Hedge funds were down last week, though they outperformed equity benchmarks and a diversified 60/40 equity/bond portfolio, according to the latest Weekly Brief from Lyxor’s Cross Asset Research team.
Lyxor writes: “High beta strategies, in which we have been defensive for some time, underperformed. Special Situations and L/S Equity strategies were under pressure. UK L/S Equity strategies underperformed in a context where the rise of the GBP vs. USD added pressure to local markets. CTAs underperformed.”
“Relative Value Arbitrage remains the best performing strategy this year. The rise in bond yields across the yield curve in most developed countries was supportive, though last week the strategy was flat.”
“The equity selloff left value stocks relatively unscathed, as they tend to be supported by rising bond yields/ curve steepening. Financials were up last week for instance. Such sector/factor rotations tend to be a hurdle for L/S Equity strategies. Market Neutral L/S Equity strategies were nonetheless protected against this rotation on the back of their lower sensitivity to momentum stocks.”
“Going forward, we remain unconvinced by the potential of value stocks to outperform in a sustainable way. Inflation is decelerating in the U.S. and remains low in Europe. We still expect bond yields to move higher but the upside is limited as the U.S. economy is probably at the peak of the current expansion cycle and should start to decelerate in the coming quarters. Value stocks are attractive at preliminary stages of the economic cycle, which is not the case at present.”
“The sharp rise in the equity/bond correlation since end of August is comparable to the move observed in late January. In both cases, markets were concerned by strong economic numbers and overheating risks in the U.S., lifting bond yields and hitting stocks with higher sensitivity to interest rates. Such market movements are a drag on multi-asset strategies that allocate to both asset classes in order to diversify portfolios. Diversified macro strategies underperformed alternative macro strategies focused on fixed income or currencies for instance.”
“Finally, EM-focused Global Macro strategies managed to be somewhat resilient. Based on a sample of nine strategies, eight were able to post returns above or close to -1 per cent. EM sovereign credit was not impacted by the recent selloff. We turned more positive on the asset class recently, assuming the USD peaked.”
