Hedge funds positioned for upside despite short-term political risks, says Lyxor
Ten Lyxor Strategy Indices out of 13 ended the month of September in positive territory, led by the L/S Equity – Variable Bias (+2.28 per cent) and the L/S Equity – Long Bias (+1.99 per cent).
Hedge funds generated solid performance in September as assets rallied post reduced Syria tensions and a dovish Fed. The Lyxor Hedge Fund Index was up 1.13 per cent while the HFRX Index was up 1.0 per cent. The average equity beta of funds increased to 31 per cent from 24 per cent over the course of the month as managers added to risk exposure. Funds have generally increased their risk exposure through September with a positive view of risk assets and to benefit from any year-end rally.
Equity strategies generally did well as the S&P 500 was up close to four per cent. L/S Equity Long Bias was up 1.99 per cent, approximately as expected by the beta exposure. However, Long Bias managers reduced risk with net exposure down 13 per cent to 66 per cent. Gross exposure remained steady at 135 per cent as reduced long positions were offset by higher short positions. L/S Equity Variable Bias gained 2.28 per cent and was the best performing equity sub-strategy. Variable funds correctly maintained high beta exposure to the market at 0.55 heading into September and have maintained this beta throughout the month. L/S Equity Market Neutral strategy was down by -1.04 per cent in September despite having positive beta exposure to the market.
Event driven strategies also benefited from the risk rally and increased net exposure over the course of September by six per cent to 62.2 per cent. Special Situations funds were up 1.95 per cent and Merger Arbitrage funds up 0.73 per cent for the month. Net exposure to equity and credit broadly stayed flat.
L/S Credit Arbitrage funds gained 0.82 per cent as credit spreads tightened in September. Net exposure increased by 10 per cent to 58 per cent due to a cut of about 10 per cent in short exposure and flat long exposure. Credit has rallied strongly since August when Verizon placed a USD50bn block of bonds. The Fed’s decision to postpone Tapering in mid September further helped the sector. Convertible Bond Arbitrage posted a return of 1.50 per cent helped by both the equity and credit rally. The funds continue to have a modest beta exposure to equities of about 0.13.
CTA Long-Term funds performed quite well with +0.46 per cent in September. CTA’s boosted exposure equities more than any other asset class. Equities remain the largest exposure of CTA’s at about 4.5 per cent. The risk budget to equities is about 3x larger than the risk budget to bonds.
Global macro funds benefited from the supportive environment where cross asset correlation is low and macro managers posted gains of 1.04 per cent in September. The managers raised gross exposure to long term interest from 173 per cent to 213 per cent while reducing gross exposure to ST interest rate, FX and commodities. Net exposure to equity declined six per cent to 50 per cent, driven by a reduction of long positions and increase of short positions. This probably expresses a cautious view of the debt ceiling negations in the US. Increased short positions by macro managers are likely concentrated in vulnerable emerging markets that have rallied the most since the summer.
Equity strategies can take advantage of the large single stock dispersion in the US and Europe and have beta exposure to upside in equities which are the most attractively valued asset class. Within the equity space, Special Situation managers have demonstrated an ability to unlock shareholder value and generate alpha. Macro managers are also positioned well in a world where central bank policy is becoming less homogenous and emerging markets volatility is creating opportunity for talented managers. Equity strategies are outperforming the HF Index in 2013 while CTA strategies are laggards.
“Funds have generally increased their risk exposure through September with a positive view of risk assets and to benefit from any year-end rally,” says Rob Koyfman, senior strategist at Lyxor AM.
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