Risk assets continued to be bruised and shaken during the second week of January, according to the latest Weekly Brief from Lyxor’s Cross Asset Research team.
On top of the Fed tightening bias, the fear that China has engaged in a currency war and the likely deepening of the US earnings recession in Q4-15, have contributed to the sharp fall in stock prices. During the first two weeks of January, benchmark equity indices fell between the range of 5 per cent to 10 per cent, high yield spreads widened by 40 and 50 bps respectively in the US and Europe, and commodities fell by 10 per cent (S&P GSCI index). Meanwhile, safe assets such as the US dollar and sovereign bonds in developed countries are up.
Hedge funds, which have adopted a defensive stance over the course of the second half of 2015, have been able to navigate the turmoil without major damage. The Lyxor Hedge Fund index is down by 0.8 per cent YTD, which is quite remarkable. CTAs have largely outperformed, being up by 3.6 per cent YTD. They have been supported by their long fixed income, long USD and short commodities positioning. Meanwhile, CTAs have massively shaved off their equity holdings during the first week of January. The equity deleveraging by CTAs early January is comparable to the cut implemented between 18 August and 25 August 2015.
With regards to other hedge fund strategies, they are down YTD by a range that spans from -0.5 per cent (Lyxor Global Macro index) to -2.2 per cent (Lyxor Event Driven Broad Index). The worst performing sub-strategy is Special Situations, down by -3.8 per cent YTD. This is a strategy that we downgraded to underweight December. In terms of funds’ performance, we note that: i) all CTAs but one in our sample are in positive territory, ii) all Event-Driven funds are in negative territory, iii) several Global Macro funds are positive, iv) in the L/S Equity space, market neutral managers are broadly positive.
Going forward, CTAs appear as the best hedge against additional nasty market developments. Lyxor believes that market concerns are somewhat exaggerated but the momentum and sentiment is so negative amongst the market participants that it seems too early to lean against the wind. Lyxor is sticking to its recommended allocation, which involves a preference for hedge funds with a relative value approach and limited market directionality.
