Fri, 07/03/2014 - 16:00
The Lyxor Hedge Fund Index was up 1.9 per cent in February, bringing year to date performance to +1.45 per cent, with 11 out of 12 strategy indices in positive territory.
The Lyxor Special Situations Index (+3.48 per cent), the Lyxor CTA Long Term Index (+3.4 per cent) and the Lyxor L/S Equity Long Bias Index (+2.7 per cent) led the way.
Gains across equity markets reversed the weak start of the year, driven by better investor sentiment and lower risk premiums. The consensus eventually ignored most of the US data noise, likely impacted by extreme weather. The end of the US earnings season finishing on a strong note and firm economic data in Europe also provided support. EM markets remain a source of concerns, where many currencies continued to sell off. Fixed income yields have not rebounded with other risk assets, taking a more conservative take on global growth.
Strong performances were recorded in L/S Equity. The variable bias funds were up +1.8 per cent, comparing nicely with their long bias peers up +2.7 per cent, with about half of their net exposure. Positions on cyclicals, non-large cap, and European stocks posted the strongest relative performance.
The variety of themes which can be expressed in European equity (including EM exposure, EU core vs. periphery, recovery themes, domestic vs. external demand dynamic) has contributed to alpha generation. Positions in Europe are gradually reweighted, in particular in consumer and industrial stocks. Long bias funds have marginally reduced their net exposure, but their long book remained unchanged. Funds focusing on Asia and Emerging markets as well as market neutral funds have unsurprisingly been lagging. On average long bias funds enter March with a 75 per cent net exposure, and a 140 per cent gross exposure; variable bias, 35 per cent and 200 per cent respectively.
Special situation funds ranked number one in February up as much as 3.5 per cent. All event driven funds got boosted by the recovery in risk sentiment. Special situation positions performed well. Merger arbitrage funds also enjoyed a fresh load of new deals
Hostile and stock deals accounted for a more significant share of the volumes announced lately. These aggressive features bode well for the gradual momentum supporting M&A trends. Mega deals including Time Warner, Verizon or Forest Laboratories announced this month were successfully played by most funds. On average, event driven funds end the month with a 60 per cent net exposure (shaved off across the board from 70 per cent early this year) and a stable gross exposure at 120 per cent. Their four main sector concentration are on communication, financials and consumer both cyclical and non-cyclicals.
Following a tough month of January, the long term CTAs rebounded strongly, up 3.4 per cent in February. They benefitted from their equity and to a lesser extent, rates positions. These had been maintained – though reduced – despite the weakness early this year. Short USD positions against Euro and GBP positively contributed. Main losses were recorded in long energy and short precious metals. Medium term models underperformed, hit in January, and again in February once positions were rebalanced.
Short term CTAs have been faster to adjust their exposure to the February reversal. They profited from volatility in base metals and agriculturals. On average CTAs are ending the month with an elevated margin to equity (around 15 per cent), resulting from current low levels of volatility and correlation. About 30 per cent of this risk is allocated to equity, and 10 per cent to bonds.
The rebound in risky assets also profited to global macro - up 0.7 per cent - which had kept a reasonably constructive take on growth. How this view was implemented in detail explains the dispersion of returns within the group. On average, they made profits on equity (in Europe in particular, which they also reweighted, reflecting the turn in relative economic surprises), on long precious metals. Losses were generally incurred in their Japanese stakes, and commodity relative value trades.
Easing spreads supported fixed income funds, though with dispersion. CB arbitrage funds were up 1.5 per cent. The bulk of their returns was generated through gamma trading and positive delta to equity. They also enjoyed strong primary markets with attractive pricings. Their market value exposure at 175 per cent remained unchanged. L/S credit funds were up +1.7 per cent. They benefitted from spread compression, with HY outperforming IG, consistent with most funds' positioning. The stabilization in EM spreads also contributed to returns (in particular positions on Argentina, Venezuela and Greece). They continue to be nimble in their positioning. They end the month with a dominant net exposure on financials, and hold significant stakes in long EU periphery vs. short Europe.
Strategies sensitive to equity and playing corporate action themes on the one hand, and the ones focusing on the relative change in momentum across markets outperformed in February. Large market swings since the beginning year, but "the volatility YTD is a perfect example of why alternative strategies offer great value versus long-only strategies," says Rob Koyfman, senior cross asset strategist at Lyxor AM.
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