Hedge funds have successfully navigated recent choppy waters, according to the latest Weekly Brief from Lyxor’s Cross Asset Research team with the Lyxor Global Hedge Fund Index slightly down at -0.4 per cent. Strategies with the highest market beta underperformed.
The long L/S Equity strategies underperformed, specifically EM and Asian strategies, hit by trade war tensions. On the other side of the spectrum, Market Neutral funds suffered moderately from a momentum reversal and their short sensitivity to low beta stocks.
Merger Arbitrage specialists outperformed. The strategy fits well with current market conditions on the back of their low sensitivity to market.
Lyxor writes: “The other strategies were overall resilient, with Relative Value Arbitrage strategies on the positive side while Special Situations benefitted from their tilt to hard-catalyst stocks. Over the last few weeks, risk factors reversed amid trade war tensions and political stress. In that context, the rally in momentum stocks that lasted for months vs. other risk factors, has started to fade. In Q2, low beta stocks outperformed on the back of supportive market conditions.”
“L/S Equity strategies have been resilient thus far to reversals, with slight negative performance in June. Yet, their sensitivity to risk factors remains a strong headwind. The strategy has a meaningful tilt to Momentum since November 2017 and remains structurally short low-beta. Additionally, they are long value, a risk factor that underperformed year-to-date. As a result, we prefer variable bias strategies that can adjust their net exposure to market conditions.”
Fixed Income Arbitrage has been positive over the recent quarters.
Lyxor writes: “Most individual managers in this space are relative value investors, which tend to perform well when bond yields rise. Such managers have also demonstrated their ability to generate steady returns with limited volatility over time.
“The rise in sovereign bond yields across developed markets in H1-18 has translated into a solid outperformance of Relative Value Arbitrage strategies versus a long only fixed income benchmark.
The HFRX Relative Value Arbitrage Index has outperformed the Barclay’s Global Aggregate Bond Index year-to-date. We believe the strategy is highly attractive for diversification purposes for long fixed income investors.”
