Factor rotation: Market neutral hedge funds stumble, but special situations managers surge

Momentum

The strong market moves sparked off by the recent coronavirus vaccine breakthrough brought gains and losses across the hedge fund spectrum over the past week, as investors fled momentum-based stocks and piled into value-based companies.

Lyxor Asset Management said on Friday the “massive” momentum reversal, which sent value stocks soaring in recent days, benefitted special situations strategies to the tune of 3 per cent, thanks to their higher market beta and value bias.

In contrast, certain trend-following CTAs and market neutral long/short funds – which tend towards a momentum bias – were hit by the rotation, registering losses of between 1 per cent and 1.5 per cent.

“Considering the fact that this rotation took place in a bullish environment, most hedge fund strategies ended the week in positive territory,” senior strategists Philippe Ferreira and Jean-Baptiste Berthon, and hedge fund analyst Bernadette Busquere Arnal, wrote in Friday’s commentary.

Elsewhere, directional long/short equity managers added 1.2 per cent, aided by market beta. Other strategy types were “relatively immune” to the factor rotations, but were lifted by the risk asset rally, including global macro funds which rose 1.6 per cent last week.

Meanwhile, analysts at Man Group in London suggested the “aggressive” momentum sell-off which turned markets upside down poses big questions for hedge funds amid potential volatility spikes further down the line.

“If this is the start of a regime change, managers should not expect a smooth transition to a new dominant factor,” Man said in a note earlier this week.

“Instead, adherents of both the old and new regimes should expect to have multiple opportunities to potentially make enormous gains. Or alternatively, to be carried out.”