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Hedge funds trim positions as coronavirus fallout hits markets

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Hedge funds are continuing to offload exposures that face a potential hit from the effects of the coronavirus, as Lyxor Asset Management forecasts a “transitory economic impact” from the deadly outbreak.

As fatalities from the virus rose to 425, and the number of confirmed cases reached 20,000, the impact on markets has remained confined to the most sensitive areas, Lyxor strategists observed in a research note.

Specifically, Chinese stocks tumbled 8 per cent, while USD, JPY and CHF rallied at the expense of EUR and emerging markets FX.  Sectorally, energy, materials, consumer cyclical and value names have been squeezed, while selected utilities, healthcare and growth stocks largely held up.

Lyxor said certain hedge fund strategies have cut their most exposed positions, but are now looking for entry points. 

Most long/short equity hedge funds trimmed their bets on consumer discretionary, material, energy, airlines exposures, and certain virus-sensitive stocks in Asia. Global macro managers marginally cut risk and added treasuries. CTAs, meanwhile, are upping their overall risk through U.S. and Asian equities, hedged with U.S. treasuries and gold exposures, and are now short energy but still neutral on base metals.

“Markets, implicitly pricing Chinese GDP below 5 per cent, are seen as oversold by some managers,” Lyxor strategists wrote.

Longer term, Lyxor suggested that any resolution to the contagion hinges on the impact of containment measures, travel restrictions and a better understanding of the virus, amid continued uncertainty.

“The coronavirus could take a greater toll on Chinese consumption than during the 2003 SARS outbreak (closest proxy for now), as it is unfolding over the peak holiday season, and the hit to spending from the lockdown might be deeper,” strategists said.

“On the positive side, authorities reacted faster, and today’s virus seems less deadly. The impact on global growth is likely to be transitory and policymakers still have fiscal and monetary ammunitions to counter the fallout.”

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