The first half of the year has seen a sharp divergence in returns between Event Driven and Global Macro strategies. These dynamics were also at play last week and so far this month, with Event-Driven extending gains and Macro funds underperforming. Interestingly, the the very same configuration occurred as of end-June 2016.
That’s according to the latest Weekly Brief from Lyxor’s Cross Asset Research Team which points out that Global Macro funds were impacted negatively last week by the sharp fall in oil prices and the fall in US and UK Treasury yields. They have maintained long positions on energy commodities for some time, while being short Treasuries and Gilts in anticipation of a rise in bond yields. CTAs, meanwhile, outperformed last week for similar reasons but an opposite positioning: short energy and long fixed income.
Lyxor writes that: “On another positive note, Event-Driven funds extended gains last week. Merger arbitrage funds were fuelled by the completion of the USD30 billion Actelion vs Johnson & Johnson cash deal. Alere vs. Abbott Laboratories was another winning trade for merger funds. On the special situations side, managers benefitted from positions on both consumer cyclical and non-cyclical sectors. The top contributor was Whole Foods Market, following Amazon’s agreement to acquire the supermarket chain. Baxter International was another gainer as the company announced an agreement with Dorizoe.
“If history is any guide, the underperformance of Global Macro funds so far in 2017 should not be seen as a reason to alleviate them in a portfolio. Actually, in the second half of last year, Macro funds experienced a sharp rebound, while the performance of Event-Driven funds eased. Yet, this reversal essentially took place in Q3 around the US election. As a great US novelist once said, ‘history doesn’t repeat itself, but it does rhyme’. In that context, we maintain the overweight stance on Event-Driven strategies. But we upgrade Macro funds to overweight. Within Macro funds, we have a preference for EM and diversified strategies compared to fixed income/ FX specialists. We also advise to fund the increased exposure to Macro funds via a lower weighting of L/S Equity Market Neutral funds, which continue to struggle with sector rotations.”
