There was a pause in trade developments and solid corporate profits fuelled risk appetite last week pushing hedge funds strategies with the highest market beta higher, according to the latest Weekly Brief from Lyxor’s Cross Asset Research team.
CTAs outperformed thanks to their long positioning across most of asset classes. Last week, long equities and USD were the main contributor to their returns.
Market Neutral and L/S Equity were both supported by the recovery in Momentum stocks.
By contrast, Event-Driven underperformed, with both Merger Arbitrage and Special Situations in negative territory. In particular, spreads widened on several deals including NXP and 21st century Fox.
CTAs staged a strong rebound in July supported by improving trend-following conditions globally.
Models reaped the benefits from the rally in global equities on the back of their significant net exposures (circa 50 per cent of NAV). Long USD vs major FX was also rewarding as the USD has been appreciating since mid-April.
Overall, all models tend to be homogeneous in terms of positioning. Most CTAs hold short positions across commodities, with the exception of energy. Nonetheless, the recent reversal in oil prices led models to halve their energy longs. In the fixed income space, they are long EMU bonds and moderately short in the US.
We maintain a neutral stance on CTAs as risk-appetite could be challenged by political risks and trade war tensions. Mid-term strategies are preferable.
Market Neutral L/S Equity strategies delivered healthy alpha last week as trade war tensions eased and economic data proved encouraging in the US.
As a result, momentum stocks recovered, which helped the strategy to regain some of their lost ground. Market Neutral strategies stood on the right side of the trade: long momentum & quality vs. short low beta stocks. They also benefited from the outperformance of growth vs. value, which accelerated over the course of the month.
On the other side of the spectrum, L/S Equity strategies also benefitted from the risk factor normalisation, however, the limited market response to strong earnings reports somewhat constrained the strategy on the upside.
