Hedge funds continued to navigate current turbulences last week with reduced direct or indirect exposures, according to the latest Weekly Brief from Lyxor’s Cross Asset team.
Lyxor says that the most decorrelating strategies continued to lead amid heightened uncertainties. CTAs benefited from their short US vs long EU bond positions, from their long dollar bets, and from their long energy. Merger Arbitrage did well as a result of tighter deal spreads and moderating deal volatility.
Other strategies were about flat this week.
Lyxor writes: “The risk premium for trade substantially strengthened ahead of the implementation of the first tranches of tariffs. Investors are not only pricing persisting stress, but they are now also factoring odds of a major escalation. Based on worst-case stress tests, a 25 per cent probability might currently be assigned for a trade war.
“The hedge fund sensitivity to this theme did firm up since June. L/S Equity and Special Situations appears to be the most sensitive. Their 30d-correlation with our US-China Trade War basket stands at about 0.5. The other strategies (CTAs, Merger Arbitrage, Fixed Income Arbitrage, and surprisingly EM focused strategies) display correlations ranging from 0.2 to 0.4 with this basket.”
“This moderate trade sensitivity is consistent with their portfolios, which in aggregate, currently hold either limited direct or indirect positions. Numerous factors are gradually turning in favour of Global Macro strategies. The divergence in world growth and monetary trends amplified this year. For now, EM markets provide the richer set of opportunities, but we anticipate a catch-up in DM markets. Moreover, the monetary normalisation which is moving forward and an ageing cycle would only accentuate economic differentiation.”
“Meanwhile, we observe early signs of a reconnection between macro assets, between FX and rates in particular. More fundamental pricing would support top- down traders.”
“The main constraints remain trade and policy uncertainties, which are limiting directionality and risk taking. It might be too early to re-weight the strategy, but we would prepare for it.”
