The Lyxor Hedge Fund Index was down 0.9 per cent in March, while first quarter performance remains slightly positive, up 0.5 per cent.
Most strategies were down apart from credit players, up 1.1 per cent, and Global Macro funds, up 0.6 per cent.
This month was particularly difficult to navigate with three main headwinds – Ukraine, China and the FOMC – having separate regional impact and global cross-asset implications.
After a bright start, most managers got hit by swings in risk aversion. Market timers were generally the hardest hit, whereas credit players, deep fundamental stock pickers, as well as top down approaches outperformed.
L/S Equity funds returns were disparate and counter-intuitive. Long bias funds outperformed variable bias funds. Regional and themes exposures, which were determinant in March, explained most of the dispersion among managers. Variable bias funds were substantially exposed to European markets and got undermined by geopolitics. Among them, the ones focusing on European periphery were less hurt than those playing the financial sector and recovery themes. Conversely, long bias funds, more exposed to the US markets, fared better.
Given their exposure, the Market Neutral funds' performance was disappointing. They were hit by a sudden turn in styles (cyclical vs. defensive, small vs large in particular) as cards got temporarily reshuffled in March. Long bias funds continued to build up their long book, now net long 80 per cent. Variable bias maintained their long books, but increased their shorts. They are net long about 30 per cent. The financial and cyclical sectors remain heavily weighted. A sign that they expect a market normalisation following an unusual month.
After a strong start, event driven funds were also caught up by rising risk aversion. Merger arbitrage and special situation funds both lost 1.3 per cent. Adjusted for their equity net exposure, the merger arbitrage funds underperformed their event driven peers. Risk aversion undermined deal spreads across the board. Disappointment and delays in several deal specifics also hurt their returns. Special situation funds endured market volatility without changing their exposure. Unsurprisingly, their substantial allocation to cyclical stakes detracted performance. Their returns were however consistent with their market exposure. Distressed funds, more heavily allocated to US credit, fared decently.
March was erratic for CTAs. Long term models continued to bleed, down -2.1 per cent. Short term CTAs were down -1.9 per cent. CTAs funds started the month having fully rebuilt their equity exposure. Swings in risk aversion and the Fed repricing hit them thereafter. Long equity and precious metals exposures detracted the most. They also suffered on their US flattening positions and long EUR crosses. Their average margin to equity was only marginally cut by end of March at around 17 per cent, in the high range observed since the last 10 years.
Global macro fared much better, up 0.6 per cent. While their equity and precious metals positions also detracted performance, they were correctly positioned to capture the repricing in interest rates and USD following a slightly more hawkish FOMC than expected.
Credit spreads widened in March but remained fairly immune to rising risk aversion – outside Europe at least. L/S Credit funds were the best performers in March, up 1.1 per cent. The spread widening in Europe broadly reflected rising geopolitical risk and disappointing inflation data. However, funds allocated to Europe had focused since the beginning of the year on the periphery theme. These trades remained fairly isolated from geopolitical developments, allowing managers to wave through March volatility. In the US, the repricing of rates following FOMC had no meaningful impact on credit spreads.
The first quarter proved less buoyant than expected on EM concerns, extreme weather, and geopolitics – at least for a part. In this context, hedge funds coped decently, up +0.5 per cent YTD. Q2 will be determinant to re-assess the path of global recovery.
"Asset allocators navigate an unusual mid-cycle. It is stable and balanced, with more fundamental pricing but fewer easy beta calls. It also remains a post-financial crisis cycle, where reforms and policies divergences lead to an asynchronous recovery with tail risks. Diversification over macro & micro themes, relative value, in-depth alpha extraction, and capital preservation are key allocation focuses. This is the exact hedge funds' job spec," says Jean-Baptiste Berthon, senior cross asset strategist at Lyxor AM.
