The Lyxor Hedge Fund Indices enjoyed a decent finish to 2013, up 1.15 per cent in December and closing the year up 7.0 per cent.
2013, the year of monetary policy players, crowned one winning bet: Long Equity in developed countries and Short both gold and rates. Neutral on all other asset classes.
Unsurprisingly, strategies playing an equity beta and restructuring themes offered the best returns, in particular L/S Equity and Event Driven funds. Conversely, L/S Credit and Fixed Income suffered from their trading fields falling out of favour. CTAs and Global Macro limited the damage thanks to raising their equity exposure over the year. Portfolio rotation toward equity was well achieved by year-end, allowing most strategies to benefit from the latest leg up in December. Witness: the average median equity beta on the Lyxor platform rose from around 20 per cent in early 2013 to 35 per cent recently.
Long bias L/S Equity strategies outperformed. Managers successfully timed markets before the summer when talks about Fed tapering spurred them to noticeably increase net exposures (from 55 to 75 per cent), while controlling risk through reduced gross exposure. Variable bias funds got more conservative by then until September (net exposure dropping from 80 to 30 per cent), when they started rebuilding net exposure. Market neutral funds yielded substantial returns boosted by the return of dispersion. Overall, equity funds adequately adjusted their sector allocation, combining high dividend stocks with cyclicals selectively picked to favour restructuring themes and short-cycle businesses. Besides they wisely avoided commodity and EM related exposures. Japanese staged solid gains amid central bank driven asset reflation.
Event Driven funds also posted strong returns in 2013 and are well positioned at this stage of the cycle. Indeed they continued to exploit turnarounds and advanced distressed situations inherited from the financial crisis. Besides, managers enjoyed a growing pool of corporate operations from cash rich companies confronted with limited internal growth prospects. In this supportive environment – economy gaining traction, ample liquidity and low default risk – event driven funds thrived most of the year. Event driven funds generally maintained their gross and net exposures (around 130 per cent and 45 per cent respectively) and kept their strong directionality.
Merger Arbitrage funds clearly shaved off net exposure, expressing some concerns as to the valuation levels reached by year end.
L/S Credit and Fixed Income Arbitrage funds played their cards nicely in 2013 given the challenging backdrop. With adverse rate and FX trends on the one hand and valuation getting stretched in mainstream credit on the other hand, those making out fine have focused on credit stakes closest to an equity play (high yield and convertibles). European credit funds benefited from a more supportive environment and took full advantage of periphery convergence plays. A dovish Fed's tackling of QE tapering spurred managers to rebuild both gross and net exposures (up to 275 per cent and 65 per cent respectively in December), suggesting more room for credit plays.
Discretionary and systematic trend players struggled in 2013. In the current transition from an early to a mid cycle, market turns are common and tricky to deal with. In addition, a load of surprises stemming from the imbalances tackled during the crisis, altered the expected cross asset scenarios. Market turns, valuation anomalies and unusual correlations were difficult to time and capture for trends players. They ended 2013 flat on average, limiting damage thanks to their equity position. Long Term CTAs (up +4.2 per cent this year) and Global Macro (flat in 2013) raised net equity exposure from 1 to 5.5 per cent and from 10 to 50 per cent over the year, respectively. Global Macro also played G3 central bank policy divergences by year end, as witnessed by their gross exposure to short-term rates increased to 110 per cent.
Hedge funds successfully navigated the specific turn of events unfolding in 2013 and finished on a positive tone boosted by the equity rally. Over the year, major valuation anomalies faded away and systemic risk receded, clearing the way for healthier asset dispersion and a switch to more idiosyncratic pricing. 2014 is expected to be a transition year from liquidity to growth opening a large set of opportunities for relative value.
“A supportive macro backdrop, fundamentals back in the equation, and the return of alpha could turn next year into a sweet spot for hedge funds,” says Jean-Marc Stenger, chief investment officer for alternative investments at Lyxor AM.
