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Hedge funds still favouring bottom-up strategies, says Lyxor

During the first week of 2018, Event Driven and diversified L/S Equity hedge funds outperformed, according to the latest Weekly Brief from Lyxor’s Cross Asset Research team.

The fallout from the US tax reform spread and boosted event positions, as well as L/S equity's cyclical stocks. Macro and Neutral equity strategies lagged. The former suffered from the weakness in USD and US rates. The latter remained challenged by sector rotations. In this piece, we present our 2018 outlook for hedge funds.
Lyxor writes: “We anticipate that extra-time of decent growth would support bottom-up strategies, though less than before and with more frequent bumps. As governments take up the relay with central banks to support the recovery, fresh themes could open alpha opportunities in the US and Europe - once election risks have eased.
“We would reweight US L/S Equity funds, but rich valuations favour deep-value and tactical styles. The deepening European recovery could boost diversified funds, though with political delays. We are overweight (O/W) diversified funds in Japan. By contrast, we are underweight (U/W) UK funds in markets paced by Brexit. We remain U/W Quant funds as long as factors are unsettled by broader themes.
“With regulation risks in the picture again, M&A operations are no longer “done deals”. This means more risk but more juice for merger specialists. We keep our O/W on Special Situations funds, nicely balanced between riskier companies at early cycle stage, and more mature companies. We expect more volatility.
“We remain O/W in multi-credit Fixed Income Arbitrage to capture opportunities from rising yields. We are neutral L/S Credit, given the asymmetric risk in rich credit spreads.
“The environment might moderate for macro trading. We have long argued that the unwinding of quantitative easing would result in greater economic volatility, more fundamental pricing, and asset returns dispersion. For now, cautious and synchronised central banks would constrain relative value in FI and the pulse in FX. Commodities might be rangy too, mirroring the soft Chinese landing. We remain neutral CTAs, their “agnostic” approach would help them navigate more selective trend opportunities. We downgrade Global Macro to neutral, with a preference for diversified styles over the FI/FX and EM focused funds.”

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