All Lyxor indices ended the month of June in negative territory with the worst index performers being the CTA Long Term (-2.64 per cent), the Lyxor Long/Short Equity Market Neutral Index (-2.45 per cent) and the Long/Short Equity Credit Arbitrage Index (-2.40 per cent).
The Lyxor Hedge Fund Index posted a negative performance at -1.63 per cent in June but remains solidly anchored in positive territory at the end of H1 2013 (+1.85 per cent YTD).
Hedge fund performance in June was hurt by de-risking and a re-pricing of all assets due to higher bond yields. Most asset classes declined in value and hedge funds were hurt by a lack of safe haven and higher correlation among assets.
Importantly, the bulk of the bond yields re-pricing might be finished. Though higher yields over the next 12 months remain a distinct probability, few market participants expect bond yields to increase by the same sharp pace as in June. In addition, investing in emerging markets proved difficult in June as the entire asset class sold off on the back of the rate funding spike in China. This funding spike was temporary and might recede as the authorities in China find a balance between curtailing credit growth and keeping financial markets functioning smoothly. According to managers on the Lyxor Managed Account Platform, the dislocation in asset prices in June represents an attractive entry point for hedge funds to benefit from normalisation going forward.
Equity focused funds performed poorly as both cyclical and defensive stocks were down in June. L/S equity long bias funds were down 1.7 per cent in June, L/S neutral funds were down 2.5 per cent and variable bias funds were down 0.4 per cent. Even though equity indices sold off, long bias funds increased their net exposure to 62 per cent from 58 per cent by adding on the long side to high conviction ideas. Variable bias funds played it more defensively, and reduced their net exposure in June from 65 per cent to 52 per cent. The new net exposure of variable bias funds is about in-line with the average of the prior year.
Global macro funds also fared poorly in June, down 1.9 per cent. Two major factors contributed to the negative performance. First, the change in tone by the Fed surprised many market participants and caused a massive coordinated selloff in fixed income markets globally. Fixed income sold off in Europe even though the ECB did not signal any policy change. The magnitude of the fixed income sell off in emerging markets was even worse than the sell-off in developed economies. EM currencies also declined vs. the USD and this likely hurt the performance of macro funds. The second major factor was the continued pullback and volatility in Japanese equities and USD/JPY. In terms of gross exposure to asset classes, macro funds decreased exposure to commodities and rates and increased exposure to FX trades over the course of June.
June proved to be a challenging month for CTAs as well. Short-term CTAs were down 2.1 per cent while long-term CTAs were down 2.6 per cent. CTAs were hurt by the bond and equity sell-off while the funds were positioned on the long side. In addition, the USD weakness versus other G7 countries in the first half of June contributed to negative performance. The continued decline of commodity prices was a positive contributor, although not enough to offset the losses in other asset classes.
Credit weakness pressured performance for funds focused on the space. L/S credit arbitrage (-2.4 per cent) and CB arbitrage (-14 per cent) were both hurt by a widening of spreads. Credit funds cut risk throughout the month with gross exposure declining to 208 per cent from 264 per cent in May and net declining to 40 per cent from 58 per cent in May.
Relative value and idiosyncratic strategies like distressed and merger arbitrage fared relatively better than other strategies with returns of -1.8 per cent and -0.1 per cent respectively. However, special situation strategies were down 2.3 per cent.
“The final month of the quarter has seen all strategies giving back performances, but this situation is unlikely to last according to the managers we spoke to. From a top-down perspective, new opportunities and more mispricing have resulted result from the current conditions while bottom-up stock pickers get ready to pick up the pieces during the upcoming Q2 earnings season,” says Stefan Keller, head of managed account platform research & external relations at Lyxor AM.