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Investors moving to alternatives says Lyxor

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Lyxor reports that risk assets have continued to edge higher over the recent weeks, with the MSCI World reaching new highs last week. Yet, equities in developed markets have been essentially fuelled by the US market, the firm says.

The S&P 500 (price index) is now up 5.7 per cent year to date (almost 45 per cent annualised) with a significant part of such returns having been achieved since 9 February, when the President promised a ‘phenomenal’ tax plan. The rally has pushed valuations further into stretched territory. Based on Factset earnings estimates, the Forward 12-Month P/E now stands at 17.7, a record since 2004. Meanwhile, economic momentum has picked up in Europe while political risk has increased ahead of key elections in major countries.

Lyxor writes that faced with the challenge of balancing risks (US stocks’ valuation, political risk in Europe) and opportunities (growth momentum), investors appeared to increase investments in liquid alternatives.

“Based on Morningstar data, inflows into alternative UCITs rebounded markedly at the beginning of 2017. At the level of individual strategies, Event Driven continued to experience solid inflows while L/S Equity Market Neutral still saw outflows last month. Reversals in flows have taken place in the Global Macro (now seeing inflows) and CTA space (now seeing outflows) and broadly reflect performance in Q4-16 (Global Macro up and CTAs down).

“With regards to recent performance, the Lyxor Hedge Fund Index was up 0.4 per cent last week (1.8 per cent month to date) and all the strategies were in positive territory. CTAs continue to outperform month to date as a result of long allocations to equities and energy commodities. On a year to date basis, Event Driven managers lead the pack and all the strategies are up in excess of 1 per cent.

“Going forward, we believe some profit taking makes sense on directional strategies after the recent rally. We, nonetheless, maintain our strong conviction on Event Driven and US L/S Equity strategies. We believe US tax reform should support alpha generation for stock pickers. Meanwhile, both strategies provide protection if political risk in Europe continues to rise.”

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