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Weekly Brief: Spike in Oil spawns moderate loss

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After a strong start to the year, hedge funds paused for breath in early February, with the Lyxor Hedge Fund index falling 0.4% for the week. Trend reversals in oil prices (up 15% during the period) and in the USD (dollar index down 0.5%) were the principal causes. Almost all strategies ended the week in negative territory. But while many CTA and commodity managers were still short energy and subsequently witnessed losses, some Global Macro managers and shorter-term CTAs were on the long side of the spectrum (see page 3).


Philippe Ferreira

Head of Research – Managed Account Platform

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After a strong start to the year, hedge funds paused for breath in early February, with the Lyxor Hedge Fund index falling 0.4% for the week. Trend reversals in oil prices (up 15% during the period) and in the USD (dollar index down 0.5%) were the principal causes. Almost all strategies ended the week in negative territory. But while many CTA and commodity managers were still short energy and subsequently witnessed losses, some Global Macro managers and shorter-term CTAs were on the long side of the spectrum (see page 3).

A few Equity L/S managers benefited from the bounce in oil prices but the overall impact on the strategy remains muted as most managers are neutral on the sector (see page 4). L/S Equity is nonetheless down over the week, despite rising markets in Europe and in the US, owing to the underperformance of the health care sector, one of their longest exposures. Similarly, Asian Equity L/S managers also struggled.  Asian equity markets tumbled following weaker-than-expected manufacturing data emanating from China, with the PMI unexpectedly dipping below 50 for the first time in over two years.

Looking forward, several managers could be exposed if these trend reversals in both oil prices and USD continue. The latter appears unlikely however, given the monetary policy divide between the US and the rest of the world. Since the beginning of 2015, 16 central banks have already announced easing measures, while in the US, the Federal Reserve is set to raise interest rates in H2-15. The recent drop in the USD appears to be a mere blip in the trend towards a firmer dollar. The outlook for oil is more uncertain. The 60% fall in the price of Brent since June is not supported by fundamentals, with signals suggesting that output in the US is adjusting accordingly. Consequently oil prices spiked, reversing the previous downward trend we have witnessed. CTAs are largely short energy but will likely adjust their positions in a matter of weeks to adapt to this new environment.

Finally, a word on Greece (see page 2). If Syriza is making the headlines and causing higher volatility in Greek markets, contagion to the rest of the euro area remains nonetheless limited. As a side note, the vast majority of managers on the platform has no Greek exposure on their portfolio.

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