Risk assets were again on the rise in July and several asset classes broke records. Last week, the S&P 500 reached an all-time high, while the spot VIX index reached an all-time low. The MSCI World (net total return local currency index) is up for the ninth month in a row, which was unseen since 1987; according to the latest Weekly Brief from Lyxor’s Cross Asset Research Team.
Meanwhile, European high yield spreads reached 10-year lows according to Merrill Lynch indices. The latest leg of the risk assets rally is taking place amid a strong earnings season on both sides of the Atlantic, with US technology stocks leading the pack. In spite of the strong momentum, we fear markets have jumped the gun on monetary stimulus and advise investors not to chase the rally at this point.
Jean-Baptiste Berthon (pictured), of Lyxor writes: “In the hedge fund space, it looks like the trend is both your friend and your foe. On the one hand, the strategies that did well over the recent months, and on which we have maintained an overweight position for several quarters now, outperformed in July. Namely, Event-Driven and Fixed Income strategies led the pack last week, in July and since the beginning of the year. From that perspective, the trend is your friend. But on the other hand, trend following strategies underperformed during all these timeframes. Overall, considering the elevated weight of CTA and Macro strategies in our indices, the Lyxor Hedge Fund Index was flat in July. CTAs continue to be penalised by their commodity allocations as short positions on both energy and precious metals contracts suffered last week.
“Event-Driven is a strategy on which we maintain an overweight stance. Last week, performances were led by the energy, health care and consumer cyclical sectors. Merger arbitrage outperformed special situations in July and is a strategy that appears particularly appealing in the context of rich valuations across the spectrum of risk assets. Over the past five years, the beta of the strategy compared to the MSCI World ranges between 5 to 15% depending on the index.
“Finally, sustained flows into alternative UCITs in Europe suggest investors are currently diversifying their assets at an elevated pace. The asset class experienced inflows up to EUR4.5 billion in June. Since the beginning of the year, inflows add up to EUR23 billion, which outpaces the number observed in H1-16.”
