Hedge funds turn cautious on high yield, says Lyxor
Markets keep grinding higher with equities buoyed by corporate earnings in the US and sovereign bond yields undeterred by the appetite for risk assets.
The Lyxor HFI Index was up 0.5 per cent last week, with CTA funds leading the pack thanks to gains on both asset classes, according to Philippe Ferreira, head of research at Lyxor’s Managed Account Platform.
The S&P 500 is reaching all times high as the earnings season is reassuring investors. But the market sentiment towards credit has started to diverge. One consequence of Janet Yellen’s recent speech to the Congress, in which some detected a “mildly hawkish message”, was the loss of momentum of corporate credit. Lower-rated bonds should post losses in July for the first time since last summer, and high-yield funds have suffered the biggest weekly withdrawal over the last 12 months.
The market move has been relatively subdued overall, but this ends a straight line performance of US credit since the start of the year. Investors are now less complacent about the asset class as valuations are considered to be stretched and the Fed is getting closer to the end of QE and the first rate hike.
As a consequence, the Lyxor L/S Credit Arbitrage index is slightly down this month (-0.6 per cent in July month to date). Losses are nonetheless quite limited as managers had become more cautious since June. They somewhat anticipated the widening of credit spreads, decreasing their net credit exposure from 70 per cent to 40 per cent of their net assets between 10 June and 15 July. The nimbleness of L/S credit managers suggests the strategy remains appealing for fixed income investors that want to diversify their long only exposures.
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