The Lyxor Hedge Fund Index was down 0.7 per cent in September, with just five out of the 12 Lyxor indices ending the month of September in positive territory.
The index is up 1.0 per cent year-to-date.
The Lyxor CTA Long Term Index led the way with a return of 2.4 per cent, followed by the Lyxor Long Short Equity Market Neutral Index (+2.2 per cent) and the Lyxor Fixed Income Arbitrage Index (+2.2 per cent).
All eyes focused on the ECB meeting before turning to the Fed’s by mid-month. The growing economic and monetary policy divergence between the US and Eurozone, as well as with most economies, unleashed firm trends in FX. Implications from a higher USD and a move toward the Fed dots weighted on US assets, in particular in segments sensitive to risk aversion and rising rates (small caps, HY) and in areas most tied to USD (global minings, cyclical commodities, EM markets, the technology sector). Strategies most vulnerable to these assets suffered the most. Strategies focusing on monetary arbitrage as well as the ones benefiting from higher dispersion and volatility outperformed.
L/S equity funds’ returns were disparate. US focused funds underperformed as markets hit the wall on Fed tightening and rising pressure from the dollar. They however produced alpha on recovering dispersion and identifiable themes. The de-risking out of European assets ended on reflation prospects and weakening Euro. Funds most exposed to Eurozone outperformed their US peers. UK exposures displayed temporary volatility on the Scottish referendum. While funds incurred losses on their energy and base material exposures, they were adequately positioned in financials. The sector was boosted by both ECB’s reflation and confidence in the AQR and stress test's outcome. Japanese funds outperformed, up by around two per cent. They hold three main sector exposures, in industrials (particularly sensitive to JPY), in financials (sensitive to BoJ reflation prospects), and consumer cyclicals (witnessing managers’ confidence that the consumption tax shock will get digested). EM and Asian funds started the month well before getting caught-up by an EM correction. The increased differentiation among countries allowed them to produce strong alpha.
Rising risk aversion unsettled most merger deals spreads. However, the key catalyst was the increased uncertainty toward tax inversion rules. The political and legislative developments were mirrored in Inversion deals spreads. These are highly correlated but increased differentiation emerges. They are factoring in the feasibility, the strategic implications and costs from a potential breakup. Special situation funds were the worst performers, with elevated returns dispersion though. Most funds were hit by a common combination of factors. The aftermath of FOMC put increased pressure on a spectrum of assets sensitive to risk aversion, liquidity premium, and to rising rates, where this strategy is vulnerable. Additionally, the rising USD was more aggressively priced in cyclical commodities, the global minings and the energy sectors; areas were numerous corporate restructurings and divestitures are undergone and traded by special situation funds.
A number of idiosyncratic situations went through turbulences. The gold miner Anglogold lost a third of its value. It is being pushed to cut its debt through further asset sales, as investors sell its bonds and stock following a botched share sale and spinoff. Civero, a provider of workers housing accommodations in the resources sector, lost half of its value after renouncing to convert into a Reits, as hoped by shareholders. The car renter Hertz, which undergoes strategic and organisational changes as its fleet ages, was down 17 per cent hit by a USD200million write-down on its high-mileage segment. Athabasca lost nearly 20 per cent. The sale laboriously closed of its oil sands project to PetroChina probably triggered profit taking. Funds' exposures to US markets and base materials (about two-thirds and 20 per cent of their net exposure respectively) made them vulnerable to this month investors' repositioning. In contrast, they endured minor losses from either their small cap exposure (the bulk of it is in large caps) or their credit & rates positions (they hold 110 per cent in equities vs 30 per cent in fixed income and credit in gross exposure.
Credit and convertible arbitrage funds suffered in September. Pressure on US assets sensitive to rates and illiquidity persisted. Lyxor L/S credit managers proved fairly resilient thanks to their conservative positioning. Weakness in some of their key themes (convergence trades or EM allocations in particular) couldn’t offset beta losses. Convertible arbitrage bled during the month. Most of their exposures concentrate in the US and Europe (two-thirds and one-third respectively). They lost both on their equity and credit exposures. Besides, primary markets lacked the pulse to generate meaningful returns. Finally, gamma trading remained constrained: implied volatility surged but not sustainably enough.
CTAs were the top performers. They made strong returns on firm trends in FX, where they held long USD positions mainly against JPY and EUR. Their returns were also driven by the plunge in cyclical commodities and in grains. The contribution from equities was muted though volatile. The medium and long term yields creeping higher in the US and EU were a drag. Medium term models, which held the highest exposure to commodities, outperformed. Short term models were flat. Their elevated exposure to equities suffered from shifting momentum.
Global macro funds were down 0.1 per cent with significant dispersion, mainly function of their commodity exposure. Their longs in energy and base metals were the main detractors. They made profits on FX trends, in particular in Euro shorts. Over the month they reallocated part of their asset from bonds to FX. They endured some losses on short positions in their European bonds. The equity contribution was overall only slightly negative. The Sovereign Fixed Income funds yet again outperformed on reflation trading.
“Uncertainty rises as Fed normalization draws near and on signs of economic weakness outside the US. So does the need for diversification across smart beta and relative value strategies,” says Jean-Marc Stenger, chief investment officer for alternative investments at Lyxor AM.
