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Hedge fund strategies make strong comeback in a ‘risk on’ environment

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The Lyxor Hedge Fund Index has gained 2% year-to-date (+0.7% in February), illustrating a strong come-back from Hedge Fund strategies in a “risk on” environment. Eleven hedge fund strategies out of 16 posted a positive return in February and 9 were above +1%, lead by L/S Equity and Event-Driven strategies.

Markets remained on a very solid footing in February, extending the already strong January gains. World equities flirted with double digit year-to-date performances. Directional segments thus continued to lead. L/S Equity strategies recorded strong performances with +3.2% for the L/S Equity – Long Bias Index (+6.3% YTD) for instance. Emerging markets, cyclical sectors and small caps posted the best returns amid a sharp decline in volatility.

Equity-oriented hedge fund managers have generally increased net exposures year-to-date in order to capture the rally. The Lyxor L/S Equity Long Bias Index gained 3.2% and the Lyxor L/S Equity Variable Bias Index gained 1.3%. The trading environment improved, as even managers with modest directional exposure achieved gains from security selection as markets normalised.

In the credit segment, high yield spreads continued to tighten significantly and supported Credit oriented managers. The L/S Credit Arbitrage Index posted a +1.7% gain in February. At month-end, the VIX implied volatility index fell back to its lowest level in six months, erasing last summer’s surge driven by the euro crisis.

Hedge fund strategies that were long risk generally benefitted and extended January’s strong gains. Foreign exchange exposures resulted in some clear differentiation
across managers and strategies. The popular short euro trade backfired as the Euro rallied hard (moving from approximately USD 1.30 at the end of January to a peak of nearly USD 1.35 at month end). However, the Japanese Yen was an even bigger story. The Yen troughed at the end of January to nearly 76 but weakened early in the month on expectations of BoJ intervention. It rocketed over 80 after the Bank of Japan expanded asset purchases and targeted a 1% inflation rate. These sharp currency movements explain some of the performance divergences across strategies that hold Forex exposures. Typically, the CTA Long Term Index was down this month (by -0.8%), while the Global Macro Index posted a +0.6% gain.

Event Driven managers also maintained January’s momentum. The Special Situations Index gained 1.3% (+4.9% year-to-date) as activist positions, post-reorganization equities, and precious metals positions all worked in their favor. The Merger Arbitrage Index posted a 1.4% gain.

According to Lyxor’s strategists, the market context is favourable for the Hedge Fund universe: “February 2012 saw financial markets further scale down the catastrophe scenario in Europe. This fuelled a risk re-pricing that was supportive for equities and commodities, while also triggering a decline in credit spreads. Monetary policy will continue to backstop systemic risk and liquidity is plentiful. At the same time, even though global growth remains unimpressive, the worst has been averted. The overall environment should thus remain supportive”.

Leveraging on the breadth and diversification of the Lyxor Managed Account Platform, the Index performance aims to be the most representative of the hedge fund industry. The Lyxor Hedge Indices are composed of funds selected by Lyxor Asset Management, available on its leading Managed Account Platform that covers all the major hedge fund strategies and benefits from a high level of transparency and risk control, while ensuring weekly liquidity. These Indices are investable, asset-weighted indices, designed to offer investors straightforward access to hedge fund performance. The Lyxor Hedge Fund Index range comprises 16 indices from global to mono-strategy or thematic indices. The Lyxor Hedge Fund Index (Global Index) reflects the average performance of all 14 strategy indices, thereby offering direct exposure to the global hedge fund universe.


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