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CTAs face renewed downward pressures in January, says Lyxor

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The market rebound started at the end of December fuelled strategies that were most exposed to risk assets, such as L/S Equity and Special Situations. This is in sharp contrast to performance in Q4-18, which was dreadful.  

That’s according to the latest Weekly Brief from Lyxor’s Cross Asset Research team which says: “Our preferred strategies are those that can navigate fast changing market conditions like those experienced recently. Merger Arbitrage and Fixed Income Arbitrage have met expectations in that respect.”
“CTAs did well in December but are under pressure in January, due to the rebound in equities. The strategy maintains short positions on equities. As previously discussed, CTA/ Macro strategies have remained broadly cautious in their positioning, keeping a defensive stance on equities and re-weighting fixed income.
“Evidence on the re-weighting of fixed income by hedge funds is also reported in publicly available data from the CFTC (with a lag due to the shutdown of the US government). Their numbers suggest nonetheless that “leveraged funds” still maintain short positions on both 2Y and 10Y US Treasuries.”
Based on the information available (hedge fund strategies on our platform), the overall positioning from Global Macro strategies in fixed income appears to be long at present, especially within Asia and Emerging Markets. Yet, Macro managers retain their short bias in US fixed income, in line with CFTC data.
“The broad universe of hedge funds has remained cautious on risk assets, except L/S Credit strategies which took advantage of wider high yield credit spreads at the end of December. None of the strategies invested in equities that we monitor have recently added to their exposures, though gross and net exposures of L/S Equity strategies have drifted upwards with the market rebound in January.”
“We also remain pretty much defensive in light of the large uncertainties ahead. The probability of a recession in the U.S. in twelve months’ time has increased and, historically, a US recession is associated with a 35 per cent drawdown of the S&P 500. Political uncertainties also remain elevated (Brexit, trade wars, U.S. political divisions/ shutdown). Finally, the US earnings season is not proving to be very supportive compared to the expectations so far.”

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