Low beta strategies outperformed in the hedge fund space last week. Merger arbitrage, which structurally has a low beta versus equity markets, was the sole strategy in positive territory, according to the latest Weekly Brief from Lyxor’s Cross Asset Research team.
Lyxor writes: “Positive contributors to performance include the Aetna vs CVS deal whose deal spread tightened on the back of media reports suggesting the DoJ may approve the deal within the next few weeks. The DoJ is also reportedly close to approving Cigna’s acquisition of Express Scripts, a significant deal in merger arbitrage portfolios. Then, the Sky vs Comcast deal spread also edged lower early September, contributing positively to performance.
“Meanwhile, CTAs were flat despite their long US equities positions and Fixed Income Arbitrage was slightly down. Strategies with a higher market beta, such as L/S Equity and Special Situations were down 1.2 per cent and 0.8 per cent, respectively. Over the summer, L/S Equity funds took more directionality by increasing market-beta. Funds also recently rebuilt their tilt to cyclicals, which was harmful early September.
“In terms of investment recommendations, we have maintained an overweight stance on merger arbitrage until now and we reaffirm it. The strategy appears to be perfectly fit for current market conditions, where downside risks remain elevated amidst high political uncertainty and rich valuations across equity markets. Deal spreads have narrowed lately but the strategy maintains its appeal thanks to its low volatility in returns and low correlation to traditional assets. The beta of merger arbitrage returns versus the MSCI World has historically been below 10 per cent. Finally, while M&A activity will probably be softer in Q3 compared to the same quarter in the past two years, but it is still strong in absolute terms.”
