The end of the year remained challenging for L/S Equity, suffering in sympathy with plunging equity markets, according to the first Weekly Brief of 2019 from Lyxor’s Cross Asset Research team. L/S Credit strategies were also caught up by widening credit spreads.
In contrast, CTAs and Global Macro strategies outperformed, defensively positioned. Attractive in a bearish scenario, they are vulnerable to a market mean- reversion, if any.
Hedge fund performance was negative in Q4. Strategies with equity market exposure such as L/S Equity and Special Situations underperformed. Their elevated weighting in global hedge fund indices dragged the performance of the industry lower. CTAs also suffered from their long equity and crude oil positioning. On a positive note, Merger Arbitrage, Relative Value Arbitrage (including L/S Credit) and Global Macro strategies were resilient.
Lyxor writes: “After consistently generating about 2 per cent of alpha y-o-y over the past two years, as per our estimates, diversified allocation of hedge funds underperformed since the summer. The dominance of political uncertainty was a primary factor. Multiple inflections (in growth expectations, rates, companies’ guidance, in oil prices), notoriously challenging to capture by most active managers (as well as passive), also contributed.”
“We expect the strategy to continue performing well in 2019. M&A activity will probably slow in Q1, as market stress spreads to business executives. The fading effect of the U.S. tax reform and stalling earnings repatriation from abroad would also play out. Meanwhile political uncertainty will likely keep cross- border transactions under pressure, increasingly scrutinized by local regulators.”
“Yet, activity should remain supported by powerful sector trends. Energy deals are likely to intensify (valuation and operations streamlining). Consolidation in healthcare and tech is far from over. The struggle to acquire content will also call for more M&A in the media.”
“With several mega deals now reaching settlement, managers’ exposures have decreased recently, giving them dry powder in 2019. Deal spreads are average, at around 7 per cent, considering a basket of live and tradeable large deals.”
