The market rebound supported the hedge fund industry last week, according to the latest Weekly Brief from Lyxor’s Cross Asset Research team, with CTAs recovering strongly thanks to the rise in oil prices and US Treasury bond yields.
Overall, models remained moderately exposed to major asset classes amid depressed trend-following conditions. They now hold neutral exposures to equities.
L/S Market Neutral funds also delivered healthy returns last week as momentum stocks recovered. The outperformance of growth vs value stocks helped the strategy outperform year-to-date. Directional strategies such as Special Situations are also up month-to-date, while Merger Arbitrage funds were resilient despite the widening of deal spreads which we discuss below.
Lastly, market upheavals have reshuffled the alpha backdrop. Correlation in stock and sector returns picked up while dispersion rose a notch.
Alpha conditions turned particularly compelling for hard-catalyst stocks with a wide set of themes, including tax reform, fiscal spending and a capex revival, that would unfold in the coming months. By contrast, we think that soft catalyst stocks will remain dominated by monetary dynamics and growth doubts.
Lyxor writes: “As a result, we favour managers with a focus on hard- catalyst stocks. It includes deep value and tactical L/S Equity in the US.”
Escalating trade war concerns and regulatory uncertainties have translated into a widening of M&A deal spreads. According to UBS, the median annualised US M&A deal spreads widened to 7.9 per cent, the largest weekly increase since mid-2013.
Impacts across Merger Arbitrage’s returns were mixed. Lyxor strategies suffered in March, as the widening was focused on their top M&A positions such as NXP/Qualcomm and Monsanto/Bayer deals. The move was wider in April, but most strategies were resilient.
“Nonetheless, the Merger Arbitrage backdrop remains compelling,” says Lyxor. “CEO confidence is strong, the US fiscal reform and strong sector dynamics provide tailwinds, especially through repatriated foreign earnings and tax savings. All of these elements contributed to a flurry of deal making in 2018 thus far, creating their ideal environment.”
