The outperformance of L/S equity versus L/S credit and fixed income arbitrage recorded in 2013 came abruptly to a halt in the first half of 2014, says Phillipe Ferreira, head of research at Lyxor’s Managed Account Platform.
The former strongly outperformed, against bullish expectations for L/S equity. But despite the poor relative performance of the latter, inflows into L/S equity remain positive.
Lyxor says the strategy is attractive, but suggests higher portfolio diversification to avoid a strong bias in favour of a particular investment style. There is a feeling amongst managers that this earnings season could be a turning point giving some directionality to the market.
The performance of event driven has been in line with investors’ expectations, according to Ferreira. Inflows into event driven were very significant during the first half, both at the global level (HFR data) and from our own lens. The AuM of the strategy on the Lyxor platform rose 15 per cent in H1-14. The strong rise in M&A activity, with volumes now comparable to pre-crisis levels, provided a broad range of opportunities for managers.
In terms of positioning, Ferreiera believes it is important to note that hedge funds have turned cautious on US fixed income and credit, thus increasing short positions. US bond yields are at low levels despite the fact that job creation, at 288,000 in June, has been above the 24 months moving average (201,000) since February. L/S credit and fixed income arbitrage appears increasingly appealing compared to long only fixed income strategies in the current environment where the US recovery is getting firmer.