Hedge funds returns were overall negative last week, dragged down by CTAs, with early signs of the BoJ moving out of ZIRP also hitting their Japanese bonds and short JPY positions, according to the latest Weekly Brief from Lyxor’s Cross Asset research team.
Some Event Driven funds also suffered from idiosyncratic events, including the NXP deal.
Lyxor writes that while L/S Equity funds consistently added alpha in 2017, their contribution has been more modest and more volatile in 2018. It has also been more heterogeneous across regions. Peaking global growth concerns and an unusual stream of political wildcards overshadowed micro developments in most regions. It also kept managers focused on risk management. As a result, it has been challenging to extract sustainable alpha out of stocks, rather driven by broader trends than by their fundamentals. Funds focusing on Japan, Asia, and EM markets particularly suffered. By contrast, US managers benefitted from more sector directionality and corporate activity. European funds enjoyed a richer set of themes and more stock differentiation.
“Meanwhile, uncertainties led many managers to cut their exposures, though unevenly across regions. It prevented them from fully capitalizing on beta contribution – when positive. Higher US exposures added extra returns. A growing number of managers say they intend to further reduce their exposures, amid heightened uncertainties but also ahead of the summer break.”
“Most of them are currently focusing on the earning season. It is half-way in the US, with an unusually elevated share of sales and earnings beat. Higher confidence in the US economic pulse is allowing for greater idiosyncrasy. Unlike the two previous quarters, stocks are getting rewarded and differentiated on their fundamentals. The consumer, healthcare and tech sectors provide the greatest source of alpha.”
“In Europe, about a third of the companies released reports that are much more modest than in the US. However, heterogeneous results and very strong stock differentiation is made, with most of the returns after release rather driven by companies’ specifics rather than by broader markets. Investors are also less demanding in terms of surprise than in the US.”
