Recent market conditions were less supportive for hedge funds, with a reversal of market moves witnessed so far this year. Last week, European equities were down and the EUR/USD went up, while US rates ended the week marginally higher. The Lyxor hedge fund index was however resilient, down only 39bps. Gains were posted by Asian managers, both on the L/S equity and Even-Driven strategies.
Head of Research – Managed Account Platform
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Recent market conditions were less supportive for hedge funds, with a reversal of market moves witnessed so far this year. Last week, European equities were down and the EUR/USD went up, while US rates ended the week marginally higher. The Lyxor hedge fund index was however resilient, down only 39bps. Gains were posted by Asian managers, both on the L/S equity and Even-Driven strategies.
With uncertainty still surrounding about the Fed stance and ahead of the next FOMC meeting on 29th April, hedge fund managers have been more tactical. As shown below, it is noteworthy that global macro funds have changed their overall exposure on US and European rates. In North America short bets have been sharply reduced, and most managers are now long, expecting a dovish tone from the Fed in the next few months, given recent weak activity and inflation numbers.
In Western Europe, macro funds have increased their short fixed income bets over the last two months, following strong gains on long positions last year. The current net short exposure is mainly played via UK Gilts and German bunds, for two different reasons: in the UK, hedge funds have been betting on stronger growth and inflation numbers for some time now. On Euro rates, short duration positions have been recently implemented, on the back of the extreme valuations reached in April: the short-term part of the curve now shows negative rates, and the German 10y was standing below 10bps a few days ago, significantly below its U.S and even Japanese equivalent.
Prominent fixed income investors recently stated that German 10 year bunds are currently the short of a lifetime, due to the limited downside on yields. It seems that most macro funds agree with his stance, but chose to play it as a relative value trade for the time being.
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