Assets under management of European L/S Equity related hedge funds on the Lyxor managed account platform may be down 15% since January 2010, but according to Lyxor’s Stefan Keller (pictured) – head of managed account platfrom research and external relations – there is a case for looking at Europe again…
Assets under management of European L/S Equity related hedge funds on the Lyxor managed account platform may be down 15% since January 2010, but according to Lyxor’s Stefan Keller (pictured) – head of managed account platfrom research and external relations – there is a case for looking at Europe again…
Over the last few quarters we have noticed that investors refrained from investing to the European theme. Assets under Management of European L/S Equity related Hedge funds on the Lyxor Managed Account Platform (MAP) have fallen by some 15% since January 2010. It is of note that this is in stark contrast to the overall investor appetite for managed accounts. More recently, investors’ flows have been particularly supportive for Global Macro, Event Driven and Equity Market Neutral strategies, while shunning Europe. There is a case for looking at Europe again.
The European Central Bank’s (ECB) recent rejection of the prospect of a Greek “soft” debt restructure via a maturity extension sent out new shockwaves, provoking collateral damage, if we may say. With the ECB suggesting it will not accept the Greek debt as collateral in such a case, a de facto bankruptcy of the Greek banking system and major disruptions for most eurozone financial counterparties would be a likely outcome, according to the Kassandras. In this context, market participants now attach a high probability of default to peripheral European sovereign countries. In comparison, emerging sovereign debt issuers are now perceived as much less likely to default.
Conversations we are having with Hedge Fund Managers on MAP focus on the opportunity set, which has emerged in European equities. In particular, cheap valuations, healthy balance sheets and corporate sales geared to global growth are the most often cited reasons on the long book. Therefore, it may come as no surprise that the median beta (i.e. net exposure adjusted for the equity market beta of the portfolio holdings) of L/S Equity – Europe-focused funds on MAP has been hovering between 30% and 40% since the Irish leg of the European debt crisis in November 2010. Currently, exposures are at the bottom end of that range.
Interestingly, five out of the seven L/S Equity – Europe-focused funds on MAP have posted decent positive performances Year-to-Date, with equity indices throughout the region behaving in a disparate manner. This higher, "better" dispersion is precisely leading to more alpha opportunities. Clearly, during the past few months, managers have been adding value above and beyond the benefits of being long a rising equity market. The correlation shock in May 2010, when the Greek leg of the European debt crisis hit all markets at the same time belongs to the past. Stock-pickers are facing a much better environment now, with the very bearish view on Europe being tempered and bottom-up news becoming again more important than top-down, macro news.
Few investors have started to embrace the European investment theme for now. Readers should keep in mind that hedge fund managers with exposure to European equity themes have demonstrated their ability to make money even in downturns. The current landscape is fertile ground for managers specialised in the region.
Stefan Keller is head of managed account platform research and external relations at Lyxor Asset Management
