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L/S Equity rebounds after a dreadful quarter, says Lyxor

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The market rebound since end of December fuelled hedge fund strategies most exposed to risk assets such as L/S Equity and Special Situations, according to the latest Weekly Brief from Lyxor’s Cross Asset research team.

Lyxor writes that this is in sharp contrast with performance in Q4-18, which was ‘dreadful’. “Our preferred strategies are those who can navigate fast changing market conditions like those we experienced recently. Merger Arbitrage and Fixed Income Arbitrage have met expectations in that regard.”
 
“CTAs have done well in December but are under pressure in early January due to the rebound in equities which caught them on the wrong side.”
 
Global M&A activity experienced a slowdown in the second half of 2018, in the context of a sharp fall in volumes in Europe and a mild slowdown in the US Despite this, 2018 ended as the third strongest year in history for deal volumes, with a wider breadth of industries driving deal flows compared to previous years.
 
Lyxor says: “US M&A activity in early 2019 suggests the momentum remains intact. Higher interest rates have not dented M&A volumes. The health care sector should remain vibrant going forward, driven by high costs, disruptive models, changing regulation, cross- industry acquisitions and vertical integration. The entrance of new players such as Amazon and Berkshire Hathaway will continue to push the industry to contemplate disruptive strategies that generally involve consolidation.”
 
“Deal spreads measure the difference between the current stock price of targeted companies and the tender offers under the terms of the deals. It gives an indication of the current shape of the market. Over recent months deal spreads have widened and now stand at 7 per cent, which is above the average since mid- 2016. In our view, wider deal spreads reinforce the attractiveness of the strategy from a tactical standpoint because they can fluctuate rapidly. They should benefit managers who tend to concentrate on complex deals. On top of structural factors discussed earlier in this report (low beta, low volatility, defensive positioning), it reinforces the case in favour of Merger Arbitrage, in our view.”

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