Hedge funds were down in sync with the wider market downturn last week, according to the latest Weekly Brief from Lyxor’s Cross Asset Research team.
CTAs underperformed due to their long exposures to US equities and their long EUR and GBP versus USD. The rise in oil prices helped alleviate some losses.
L/S Equity were also on the downside. US and EM funds were the main detractors in line with their underlying benchmarks. US managers particularly suffered from sector rotations.
The widening in M&A deal spreads including NXP vs. Qualcomm hit Merger arbitrageurs.
Market Neutral and relative value players were resilient.
Since the start of the year, the 2018 EPS growth has been revised up by 7 ppt in the US to 19.8 per cent, reflecting the reform fiscal. That did not prevent S&P 500 companies that reported thus far (50 per cent) surprising positively on both profits and revenues.
The reduction in the corporate tax rate boosted US companies’ revenues left after all expenses. In Q1-18, the net profit margin of the S&P 500 grew by 11.1 per cent year-over-year, a record-high according to Factset. It is worth mentioning nonetheless that net profits margins improved also in 2017, before the tax bill became law. Financials, Healthcare and Materials recorded their highest net profit margins in Q1.
Analysts expect even higher net profit margins for the remainder of 2018, boding well for any concerns over wage increases and other rising costs.
Investor appetite for hedge funds (offshore) took a breather in March, with USD9.6 billion of redemptions. However, the underlying health is better than numbers suggest.
Redemptions have been highly concentrated in March. CTAs suffered the bulk of outflows (USD 6.0 billion) on par with some months in 2013-14, due to the poor results in February. Redemptions have also been concentrated on some managers of a same strategy. The Macro strategy suffered USD 2.3 billion outflows, but most Macro managers received inflows in March. It reflects high discrepancies across funds’ returns and allocations.
Finally, investors maintained their growing appetite for L/S Equity and Market Neutral (USD4.2 billion of inflows). But fewer than half of managers were benefiting.
Overall, allocations into hedge funds remain in the positive territory year-to-date, at USD 14.3 billion.
