Fri, 07/02/2014 - 15:36
The Lyxor Hedge Fund Index was down only 0.4 per cent in January, outperforming the MSCI World Index, which was down 3.8 per cent.
Eight Lyxor Strategy Indices out of 12 ended the month in positive territory, led by the Lyxor Fixed Income Arbitrage Index (+1.74 per cent), the Lyxor Merger Arbitrage Index (+0.92 per cent) and the Lyxor L/S Equity Market Neutral Index (+0.83 per cent).
Following three weeks of tactical retracement to digest the year-end rally, multiple events in emerging contributed to unsettle EM and DM markets – in particular global equities, USD-JPY, and weaker US LT yield. Weak PMI in China, concerns about the vulnerability of its shadow banking and instability in Turkey, Argentina and Ukraine, awoke broader investor concerns. Concerns about a risk of contagion from EM twin deficits countries. Concerns about the pace of global recovery, as economic readings weaken. Doubts on central banks' will to do 'whatever it takes'. After a quiet start, the strategies most directionally exposed to equity markets - L/S equity, special situation and CTAs - have detracted performance by month-end. In contrast, relative value strategies have successfully weathered market instability.
L/S equity funds entered 2014 with a reasonably constructive outlook. They shaved off some of their exposure in early January. Long bias funds reduced their gross exposure by around 10 per cent, variable bias reduced their net exposure from 45 per cent down to 35 per cent. With a strong overall exposure to cyclical sectors though, their average market beta continued to hover around 35 per cent. Rising equity dispersion, the start of the earnings season, and healthier short trading conditions were favourable to variable and market neutral bias funds. They outperformed long bias funds prior to the sell-off. Afterward, European funds outperformed their US peers. Long bias funds ended January down -1.6 per cent, variable bias up 0.5 per cent, and market neutral funds were up 0.8 per cent. Hedge fund managers have not meaningfully altered either their gross or their net exposure so far, which is a sign that they aren’t buying an EM contagion scenario for now.
Similarly, event driven funds produced positive returns during the first part of January. Range trading equity markets had a limited impact on deal-specific merger spreads. Increased flows of M&A deals early this year provided a fresh pool of opportunities for managers. Meanwhile the main activist positions held in portfolios continued to progress. Unsurprisingly, rising risk aversion in the second part of January dented into merger spreads and into the long exposure of special situations funds. While the environment remains supportive for merger funds, cooling liquidity in the US and more fairly valued companies will likely incline hedge fund managers to be more selective.
In Japan, a capex rebound and corporate cash hoarding bode well for M&A trends, in particular in cross borders, which have represented the bulk of Japanese operations since 2012. The merger arbitrage funds ended January up 0.9 per cent, and the special situation funds down only 0.2 per cent.
Dispersion among CTAs was striking during the month. Long term CTAs were down as much as 5.4 per cent in January, in contrast with short term CTAs ending up 0.4 per cent. In the first part of the month, long term funds generated performance on commodity FX shorts and long USD positions. Meanwhile, directionless equity markets provided limited opportunities for short term CTAs, flat over these three weeks. The wheel then turned, with a dominant exposure to equity. Long term funds took a severe hit, on their JPY-USD cross exposure as well.
Equity losses incurred by global macro funds during the sell-off were offset by gains accumulated earlier in the month -in long duration US and EU trades in particular. They ended flat. FX and LT rates are their largest gross exposures as we enter February. They enjoy a growing set of opportunities from DM's central banks dispersion and relative value trades in EM markets. While net neutral on EM, FX and energy, their average 60 per cent gross exposure on these two markets illustrate some of their market themes.
Softer data in the US and a slight disappointment from the Fed's resolution to maintain its envisaged pace of tapering provided a favourable backdrop for credit and fixed income funds. CB managers and credit arbitrage funds accumulated small gains in the early part of the month, courtesy of marginally tightening credit spreads. Later on, rising implied volatility mitigated the losses incurred by CB managers on the equity component during the sell-off; and L/S Credit funds' cut in their net exposure from 70 per cent to around 40 per cent during the three first weeks of January, mitigating the impact from widening spreads across the board. They all ended up the month with positive returns, up 0.5 per cent on average.
Hedge funds have taken the lead in asset class ranking in January, with relative value approaches offsetting losses in more directional strategies. "Healthy market dispersion, EM and DM macro themes, a set of micro arbitrage in corporate operations, EPS releases, sector rotation: some of the key ingredients for alternative investments' outperformance", says Jean-Baptiste Berthon, senior cross asset strategist at Lyxor AM.
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