Mon, 10/06/2013 - 16:01
Nine Lyxor strategy indices out of 14 ended May in positive territory, led by the Special Situations Index (+3.05 per cent), the Lyxor Long/Short Equity Long Bias Index (+1.66 per cent) and the Lyxor Merger Arbitrage Index (+1.53 per cent).
The Lyxor Hedge Fund Index posted a positive performance at +0.33 per cent in May (+3.53 per cent YTD).
Investors were cautious heading into May as soft economic data led to a strong sense of déjà vu and fear of another risk-off period in the spring. However, the economic data strengthened significantly starting with the US April nonfarm payrolls report in the beginning of May. Risk assets generally rallied in May but the bigger theme was the sharp rotation out of defensive sectors and assets into those with a more cyclical tilt.
MSCI World was flat in May, showing dispersion among regions. European markets continued to climb higher spurred by the ECB’s decision to cut rates in addition to some stabilisation in the economic data. Japanese equities were up 15 per cent through mid-May but a reversal and subsequent decline in the index trimmed the gain for the month. Bonds showed significant weakness in the month of May across all regions as better economic data made investors question the ultra low yields of government bonds. Credit spreads continued to trade tighter and commodities fell, paced by a decline in gold, while Brent was relatively stable. Volatility increased from recent lows to 14 but is still fairly subdued.
Deflationary pressures are still skewed to downside in Europe and US, where CPI registered 1.2 per cent and 1.3 per cent, respectively. Market focus remains squarely on central bank policy. In Europe and Japan the pace of easing is the main topic of discussion but in the US, the main question relates to the pace and timing of QE tapering. Bernanke’s testimony reiterated that FED may reduce the pace of asset purchases in the next couple of months and will be dependent on the strength of the US economy.
The general risk environment was positive in May benefiting the overall hedge fund universe. Hedge funds in aggregate on the Lyxor platform were positioned for the risk-on environment and generated an overall return of 0.3 per cent. The YTD performance in 2013 is 3.5 per cent. Going forward, systemic risks will likely remain contained by policy makers and central banks through the rest of the year.
The equity rally benefited long/short equity funds which are positively correlated to the market. Long Bias managers within the long/short space generated strong May performance of 1.7 per cent and were helped by the climb in equities. The beta exposure of long bias funds stands at about 0.5 which is the highest level of 2013 and shows that managers have an overall bullish view of equities going forward. The current level is still below the 0.6 beta which was the maximum exposure in 2011 and 2012. Net exposure of 58 per cent has remained fairly constant throughout the year suggesting that these managers are increasing their beta by rotating into more cyclically, higher beta sensitive stocks instead of increasing positions in the overall books. Variable Bias managers also generated a healthy return of 0.6 per cent in May and are up 5.5 per cent YTD. These managers have also increased their net exposure to 80 per cent which is the highest directional exposure since 2007. An environment with low stock correlation continues to provide long/short equity funds with the backdrop to take advantage of alpha opportunities.
Credit indices were tighter in May and funds in the long/short credit space generated a solid 1.4 per cent. The recent positioning of these funds suggests that managers are becoming weary of the index rally though overall risk budgets remain near YTD highs. Median beta of the funds versus the HY index is at 0.4 which represents the lowest level YTD in 2013. The managers are more focused on finding idiosyncratic opportunities as opposed to playing a continued spread compression given that spreads are at record lows. Gross exposure has remained constant YTD at about 270 per cent with 160 per cent long and 110 per cent short. Convertible bond funds were up 1.3 per cent in May benefiting from the rally in both credit and equity.
Special situations and merger arbitrage funds generated among the best returns in May, up 3.1 per cent and 1.5 per cent, respectively. Several M&A transactions and risk-on environment contributed to the positive returns of the strategies. Global macro funds were up 0.3 per cent in May.
The reversal in Japanese equities and currency mid-month clipped the performance of many macro funds which have been involved in playing the positive implications of Abenomics. The net equity exposure of macro funds at 30 per cent is close to the YTD high and is near levels not seen since beginning of 2011. CTAs focused on short term and long term trends did poorly in May, -1.7 per cent and -3.4 per cent, respectively. The short term strategy was hurt by the reversals that took place in May including a shift from defensive to cyclical sectors and reversal of Japan. The long term strategy was hurt by the sharp sell-off in government bonds globally.
“For the first time in more than three years we didn’t have any ‘bad’ news out of Europe. Recently, Europe has been surprisingly calm and it appears that investor concerns have turned to other parts of the world. We register that Hedge fund managers can better cope with this new environment,” says Stefan Keller (pictured), head of managed account platform research and external relations at Lyxor AM.
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