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Hedge funds struggled in October but there were huge differences between and within strategies

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The selloff in October was difficult to navigate for hedge funds, but there were substantial divergences across strategies, according to the latest Weekly Brief from Lyxor’s Cross Asset Research team.

Lyxor writes: “L/S Equity and Event-Driven strategies underperformed due to their elevated market beta. L/S Equity strategies also suffered due to the rotation in risk factors which saw growth/momentum stocks underperform value and low beta stocks. Within Event-Driven, Special Situations strategies were particularly hurt but Merger Arbitrage managers were highly resilient.
 
“On a positive note, L/S Credit, Merger Arbitrage and Market Neutral L/S strategies were highly resilient thanks to their cautious positioning and low market beta. Global Macro strategies were also resilient, in several cases due to short positioning on equities.”
 
“The rise in bond yields since end-August and the upsurge in risk aversion in October led many Global Macro/Multi Asset strategies to significantly reduce their short duration positions on Treasuries.”
 
“CFTC data also reported that leveraged funds have reduced their short positions on Treasuries, though the extent of the move is smaller compared to trends in individual strategies.”
 
“Meanwhile, real money investors have continued to add to their long positions over the course of 2018 and during the second half of October. Their long positions on both the two-year and 10-year Treasury bonds stand at multi-year highs (a record high for the two-year, with data back to 2006).
 
The appetite for Treasuries from real money investors is occurring in a context where short-dated Treasury yields are at a record high over a decade.
 
“Data on US equity positioning also point to a wide divergence between real money and leveraged funds.”
 
“The most interesting feature of this dataset, in our view, is the real money positioning. This points to significant cuts in exposure to US equities over the course of October, suggesting the selloff was caused by institutional investors rushing to the exit last month. That contradicts several media/broker reports pointing to quantitative hedge fund strategies as aggressive equity sellers.”
 
“The data on hedge fund positioning (ie identified as leveraged funds in the dataset) is less relevant in our view. According to CFTC data, such investors have almost always been net short of the S&P 500 (the dataset started in 2006). But this is a very partial representation. The dataset only reports positions on index derivatives, which hedge funds use to hedge positions on single stocks in their long books.”

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