Lyxor Chenavari UCITS team switching to alpha opportunities in “choppy waters”

Choppy waters

The team behind the Lyxor Chenavari UCITS fund is repositioning the strategy for upcoming alpha-generating opportunities arising from the “choppy waters” of the forthcoming US election and Brexit.

While the fall-out from the pandemic continues to loom over markets, the Lyxor Chenavari UCITS team at Chenavari, a London-based credit-focused hedge fund, believe markets will be shaped by more immediate concerns on the horizon short-term.

“The extraordinary rally since the lows in March – the S&P up 60 per cent from 23 March to 2 September - should give way to more choppy waters between now and the end of the year,” they observed, pointing to the fast-approaching US election, and its impact on the US-China relationship, as well as the UK’s withdrawal from the European Union, scheduled to be completed at the end of the year.

In a recent market commentary, the team suggested the Lyxor Chenavari UCITS strategy – which trades financial and corporate credit long and short - is positioned “as nimble and agnostic as ever” after a “satisfactory” 12 months.

The strategy has gained 4.9 per cent in its USD share class since the start of 2020 – and 7.8 per cent over the 12-month period. Its euro-denominated class advanced 4 per cent over the last eight months, and is up 6.2 per cent on a 12-month basis.

The Chenavari UCITS team has eased the convexity profile within the fund’s portfolio in case of a major market collapse, with the slight long bias in its positioning – which helped capture market beta during the tearing run that markets enjoyed over the summer – having been reduced in recent weeks.

As a result, the strategy is now zeroing in on alpha-generating opportunities, particularly in idiosyncratic opportunities in corporates, based around strong recovery stories as businesses normalise.

The small decrease in risk has been mainly in its corporate book, chiefly through certain index hedges and the reduction of selected long bets such as Fiat Chrysler, Carnival and IAG. Elsewhere in corporates, the fund is positioned long in German sensor manufacturer AMS, Italian gaming company Gamenet, and UK pub operator Stonegate. Its shorts include Teva pharmaceuticals and the Chemical group Ineos.

Meanwhile, the financials strategy’s credit sensitivity increased over the summer as a result of increased exposure to Spanish subordinated debt, particularly Sabadell, which proved a strong contributor to performance. As the fund has switched out of AT1s towards the senior end of the capital structure, it is now betting against certain UK banks, such as Lloyds and Natwest, which Chenavari’s UCITS team seeing a potential squeeze from a hard Brexit.

“We believe that the upcoming market environment lends itself well to our strengths, with “beta only” funds being affected by more volatile markets, whilst long/short funds can implement their name selection process without the fear of missing out on an exuberant bull market,” the team explained.

“In particular, after a whirlwind of sector rotation and a “K-shaped” recovery, significant gaps in pricing have emerged amid names, creating good risk/reward opportunities for research-driven name selection.”