Most hedge fund strategies remained in positive territories in the past week, with Global Macro leading the pack, benefitting from short European bonds and from positions in Japanese FX and equities, according to the latest Weekly Brief from Lyxor’s Cross Asset Research team.
The Lyxor Merger index is up +7 per cent year-to-date. While deal spreads tightened up until the summer, they have widened since then. Merger funds though, have emained immune.
Lyxor writes: “Since the end of last year, the perception of merger risk receded. The number of deals motivated by an inversion objective dried out and very few operations broke out (less than 2 per cent). In parallel, prospects of foreign earning repatriation and improving corporate profits maintained an attractive relative carry vs. credit or yields, with limited duration risk (M&A deal rarely last more than a year). This lured a number of non-merger specialists in the space. As a result, a growing number of operations became priced for perfection with several months still running before completion. They were vulnerable to any surprise in earnings or a change of tone in antitrust regulators.”
“Instead, merger specialists focused on the most complex deals, which offer bidding war prospects and higher spreads. They also became more tactical on the richly priced mainstream operations, being short when the risk asymmetry reached a climax. We believe that this strategy should be run by experts, with prior legal reviews and careful valuation analysis. We maintain our OW on the strategy.”
