Since the trough of the recent sell-off, L/S Equity funds have outperformed other hedge fund strategies, according to the latest Weekly Brief from Lyxor’s Cross Asset Research team.
Their cautious stance since the end of January led them to partially catch up the rebound. Nonetheless, it allowed the most directional managers to alleviate the impact of the sell-off.
Relative Value Arbitrage managers demonstrated again their ability to perform well in a rising bond yields environment. Fixed Income and Credit managers were resilient to the market downturn in February, similar to that of credit markets. They also remained isolated from the recovery.
CTAs and Special Situations were the main detractors in the recovery post sell-off.
The sell-off in February did not impact L/S Equity Market Neutral funds too much overall, but there were discrepancies across regions and sub-strategies.
Statistical arbitrage insights were particularly damaging across all regions. Global systematic strategies fared relatively well as their US and EM equities exposure compensated for the more difficult trading environment in Europe.
Discretionary L/S Equity strategies outperformed. Some managers marginally rebuilt exposure during the sell-off and well captured the recovery of the end of the month.
Overall, L/S Equity managers ended the month on a wait-and-see mode in anticipation of bumpier markets. Conditions remained nonetheless supportive for stock pickers with a wide set of themes, including a positive earnings trend, tax reform and fiscal spending.
In February, Merger Arbitrage funds remained isolated from market jitters due to their low-beta features. After the sell-off, they made little changes to their exposures.
Some funds nonetheless suffered from the Akorn vs Frenesius transaction at the end of February. The USD4.3 billion buyout offer of the US generic maker was under pressure after the two companies announced they were investigating whether Akorn violated FDA drug development standards. Akorn’s stock slumped by 40 per cent.
Lyxor writes: “With US deal spreads at 5 per cent early March and sustained M&A activity, the environment of Merger Arbitrage remains appealing in our view.”