Fri, 09/05/2014 - 16:11
The Lyxor Hedge Fund Index was down 0.7 per cent in April, with six out of 12 Lyxor Indices ending the month in positive territory.
Year-to-date the index is down 0.1 per cent.
The Lyxor L/S Credit Arbitrage Index and the CTA Long Term Index led the way in April with each returning +1.0 per cent, followed by the Lyxor Global Macro Index (+0.9 per cent).
Data published in April did not alter the macro picture of major economies, that of a low inflation and modest but firming growth. Amid tight market trading range, falling cross asset volatilities, and without clear catalyst, a US equity sector rotation upset traditional hedged equity approaches, in style, in size, and in momentum. Strategies most exposed to these approaches and to short-term market reversals suffered the most: L/S equity and short-term CTAs. Meanwhile, strategies focusing on credit and macro themes profited from continued carry chase and central banks developments.
L/S Equity funds were down with significant dispersion. An equity rotation came with a vengeance on a selected number of US sub-sectors including Internet, Biotech, and growth small caps. Stretched valuation, crowdedness – in particular from hedge fund managers – and unexpected global liquidity flows were probable catalysts. The rotation unsettled equity hedged approaches widely implemented by L/S equity managers. In particular Pair hedged, Systematic or Growth oriented types of funds were caught in a double whammy. The variable bias underperformed long bias funds, but their average performance actually mainly results from three funds heavily exposed to ultra-growth stocks.
The rotation was mainly observed in the US, with limited spill over to other regions. In Europe, the ebb and flow of the geopolitical risk made market timing challenging. Interestingly managers maintained the bulk of their positions over the period. Long biased funds kept their gross and net exposure unchanged at 160 per cent and 85 per cent respectively. Variable biased funds held a 35 per cent net exposure. Funds which were hit the hardest in April recouped only part of their losses by month-end: in the absence of an equity rotation capitulation, main losers didn't materially rebound.
As investors struggled to understand the causes of and implications from the equity rotation, risk aversion reached out to event driven positions. Merger spreads widened before normalizing by month-end. Bidding wars in key recent jumbo deals allowed merger funds to cope well, and finish the month up +0.2 per cent. Special situation funds were down -0.9 per cent on average. They hold significant stakes in communication and other cyclical & growth oriented sectors. These positions suffered in the early part of the month before rebounding thereafter.
On average, Lyxor's event driven funds hold a 12 per cent net exposure on communication, 11 per cent on financials, 10 per cent in consumer non-cyclical, eight per cent on consumer cyclical. They marginally reduced the overall net exposure down to 50 per cent by cutting their long positions, in particular among consumer cyclical stocks. Distressed funds, more heavily allocated to US credit, and less exposed to the growth sectors, fared decently. They also profited from a distribution on Lehman claims.
The equity exposure held by long-term CTAs models has increased the volatility of their returns. Losses in the early part of April were recouped by month-end. They were up +1 per cent. Short term CTAs incurred severe losses in the second week, but haven't regained the lost ground: their exposures were switched prior to the market rebound. On average, most CTAs funds lost on equities and USD during the market turmoil, but recorded positive contribution from commodities and rates.
Global macro funds were up +1.3 per cent in April. They successfully played the dovish rhetoric competition among G3 central banks and the relative economic momentum turning in the favour of Europe and UK. They were also adequately positioned on commodities. They end the month with significant gross exposure, displaying allocation to ST rates and FX significantly larger than historical averages. A sign that their universe of opportunities is widening.
L/S Credit funds were the best performers in April. While HY slightly underperformed IG, the asset class remained largely isolated from equities' turbulences. Lyxor's credit funds profited from further credit tightening in EU periphery and made some gains in EM debt. Convertible arbitrage funds mitigated delta losses thanks to their credit exposure and gamma trading. They also continued to enjoy healthy primary markets. Their significant stakes in Energy and Financial contributed to offset losses in other sectors. Credit funds then fully profited from the month-end market rebound, both in cash and derivatives. On average, they hold a 60 per cent net exposure with a 280 per cent gross exposure.
Diversification among hedge fund strategies have so far allowed to wave through the succession of risks which have emerged year to date. Still the full potential from the current macro and micro themes has yet to unfold.
"Clearer economic prospects in H2 should provide some base for firmer trends in risky assets. In the meantime continued range bound trading is the most probable scenario, which should cap allocation returns," says Jeanne Asseraf-Bitton, global head of cross asset research at Lyxor AM.
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