Three Lyxor strategy indices out of 13 ended the month of August in positive territory, led by the L/S Credit Arbitrage Index (+0.51 per cent), the Convertible Bonds Arbitrage Index (+0.26 per cent) and the Event Driven – Merger Arbitrage Index (+0.04 per cent).
The Lyxor Hedge Fund Index posted a negative performance of -1.13 per cent in August (+2.02 per cent YTD).
Hedge funds lost ground in August but many alternative strategies held up well despite increased volatility across asset classes. Risk premium increased notably as investors debated the size and pace of the Fed’s tapering, considered the softening fundamentals in emerging markets and assessed the geopolitical risks in the Middle East. However many managers, especially on the equity side, entered the month with reduced risk given the strong run of assets YTD and “known known” risks in September. Overall hedge fund beta remained mostly steady in August at 0.27. The Lyxor Hedge Fund Index in August was down 1.13 per cent but compares favourably with other assets.
Managers in the long/short equity segment had modest negative draw-downs of between one and two per cent. Long bias funds generated a -1.02 per cent return in August while the less directional funds didn’t fare better. For example, Variable bias funds were down 1.91 per cent and neutral bias funds also slightly declined 0.95 per cent. The performance of most long/short equity funds was hurt by increased equity correlation in almost every region. Risk exposures over the month for long/short managers held fairly steady as most funds de-risked heading into August. For example, net exposure for variable bias managers remained at 37 per cent but was already down from 55 per cent at the start of July. While net exposure declined since the start of July, gross exposure stayed almost unchanged, driven by a decrease in the long exposure and an increase in the short exposure. Equity managers clearly shifted into more defensives away from cyclicals in the US.
Specifically, funds reduced their US net exposure in materials (from 6.2 per cent to 5.5 per cent) and energy (7.3 per cent to 6.4 per cent) sectors and increased their exposure in the consumer staples (6.2 per cent to 8.6 per cent) sector. In Europe, the shift was more pro cyclical and probably driven by the quickly improving economic data in the Eurozone. The biggest change was in Industrials were net exposure increased from 3.7 per cent to 5.2 per cent but managers also closed out their short in materials (-2.1 per cent to 0.3 per cent).
Credit related funds fared better in August than peers.
Long/short credit funds were up 0.51 per cent despite credit spreads wider in August and interest rates higher. Gross exposure for L/S credit funds has declined from 63 per cent at the start of July to 35 per cent today, driven by an increase in shorts and a decrease in longs. Beta to the high yield index has also declined from 0.57 to 0.26 in the same period. The defensive shift over the past two months has helped the fund despite the soft performance of the overall index. Convertible arbitrage funds also managed to finish the month with gains of 0.26 per cent.
Merger arbitrage and special situation funds held up relatively well, up 0.04 per cent and down 0.26 per cent, respectively. Takeover spreads were mostly stable despite the equity sell off and spreads in some big M&A deals, like Dell, narrowed as completion appears closer in sight.
Global macro funds declined 0.66 per cent in August as cross asset volatility and correlation increased hurting manager performance. In addition, the funds have a long exposure to equities of 55 per cent which is at the top of the YTD range. For comparison, macro funds had about 30 per cent net exposure to equities at the start of the year. The largest increase in risk over the past month has been in the short term interest rate segment where gross exposure increased from 72 per cent to 84 per cent. The segment is particularly interesting because interest rate futures are implying a much faster rise than central banks are communicating to the public.
Performance for CTAs continues to disappoint with short term CTAs down 1.34 per cent in August and long term CTAs down 3.99 per cent. Equity exposure represents the biggest weighting among assets for CTAs and dragged down the performance. Long term CTAs have a beta of 0.44 to the S&P 500 vs. 0.16 for short term, which explains why long term CTAs underperformed their short term cousins. In addition, the CTAs have a net short exposure to metals and agricultural assets and the August bounce for these assets hurt performance.
“The rapidly shifting macro environment in the fall should provide an opportunity for hedge funds to monetize strong views and generate alpha,” says Rob Koyfman, senior strategist at Lyxor AM.