The market recovery gathered momentum last week with the S&P 500 hitting new high. Equities were up, high yield spreads down and the VIX is back to the 12-14 range.
Market sentiment was boosted by positive data on US jobs and better than expected releases in some European countries. Trends in FX and commodity markets continued, with the US dollar edging up against major currencies while energy and precious metals slide. This framework was supportive to CTAs.
Despite this remarkable upswing, the Lyxor Hedge Fund index was still in timid recovery mode, up 0.1% last week. This is now the 4th consecutive week of positive performance, up 1% since mid-October. However, dispersion among strategies remains high, with CTAs leading the pack. In terms of positioning, momentum players recently turned short European equities. This is in stark contrast with discretionary managers, which remain long European equities. But the underperformance of Global Macro managers versus CTAs this year does not bode well for European equities.
Event driven strategies were also in recovery mode on the back of special situations managers (+0.8% last week, +2.3% over the past four weeks). Merger arbitrage is flat, but gross deal spreads (the difference between the offer price and the current stock price) have widened over the past two months. The awaited rebound of the strategy is related to the fact that the spread widening took place without substantial changes in the deal profiles for most of them. Hello,
L/S Equity is the worst performing strategy. Most of the disappointment came from European funds which suffered from their short exposure on energy services names (see page 4). US managers fared better as they held onto their long positions on retailers before Black Friday. Despite this, they failed from fully capturing the market rebound on the back of their low exposure to the energy sector, which experienced an unexpected rebound last week.
Within the L/S equity space, our newly launched EM manager continues to deliver solid returns (+5% month to date) despite a weak performance of the MSCI EM. This is in line with our view expressed in the latest research piece. In Alternative EM Offers Diversification in Current Market Conditions we highlighted that alpha generation potential in emerging markets is elevated. Our EM L/S Equity manager is currently providing a good illustration of this.
