In recent months, Market Neutral L/S strategies underperformed other hedge fund strategies, in a context where risk assets rallied following the Pfizer vaccine announcement in November 2020.
Lyxor’s stance on the strategy remains Underweight on the back of its exposure to the Momentum risk factor, which appears poorly suited for the current environment.
Market Neutral L/S experienced diverging fates in the past three months, but on average their performance has been disappointing, as it was already last year
Lyxor’s views on the strategy remain quite defensive for two main reasons. Market Neutral L/S is a defensive strategy by nature, which is less attractive as the global economy heads towards a recovery.
Additionally, Lyxor estimates suggest the Market Neutral L/S and in particular, quantitative approaches, display a significant long bias towards the Momentum risk factor in equities.
With bond yields starting to edge higher, the Momentum risk factor in equities appears vulnerable and may deliver minimal returns in the midterm. Although Market neutral L/S strategies have diversified this source of risk by gaining exposure to Value stocks, the returns of such strategies might continue to disappoint for some time, in relative terms, even if we adjust for volatility.
On a year-to-date basis, Merger Arbitrage remains the best performing strategy (+2.4 per cent) in a context where SPACs experienced a sharp rebound (+17.9 per cent for the IPOX SPAC Index year-to-date).​
