Renewed selling pressure has translated into sharp losses for risk assets lately, with the European banking sector at the forefront of the selloff, according to the latest Hedge Fund Brief from Lyxor.
As usual in such episodes, equities, commodities and high yield credit were down, while “core” sovereign bonds posted gains.
Hedge funds have been pretty resilient in such adverse market conditions. As discussed in previous editions of this report, they have maintained a defensive allocation that proved highly supportive. The Lyxor hedge fund index was down 2 per cent during the period under review (2-9 Feb), while the MSCI World was down 3.3 per cent, and high yield spreads widened by 40 and 60 bps in Europe and the US, respectively.
CTAs continue to outperform, being up 0.8 per cent this week, while macro managers underperformed. There was nonetheless significant dispersion in the returns of Global Macro funds, with the most directional and the most exposed to European equities underperforming. The performance of the remaining hedge fund strategies (L/S Equity, Event-Driven and Fixed Income & Credit strategies) was tightly packed at -2 per cent.
During the most recent days, the selling pressure on European banks has increased. Bank stocks fell by double-digits in a matter of days and credit spreads widened. From our understanding, this is related to a combination of factors such as: i) disappointing earnings; ii) issues related to specific banks in Germany and Switzerland that are systemic; iii) unstable regulatory conditions; and iv) concerns over global growth conditions which is leading several central banks to cut rates further into negative territory. Yield curves have flattened as a result. This is hurting European banks’ profitability. But their valuation has reached such depressed levels that to us, it seems out of sync with the fundamentals.
The performance of hedge funds reported here does not take into account the market movements of the past few days. However, the direct impact of the European banking sector sell off on hedge funds is likely to be negligible. Strategies that have single stocks and sector biases in portfolios such as L/S Equity, Event-Driven and L/S Credit have a limited overall exposure to European banks.