Hedge fund returns since 26 October are up +0.5 per cent, primarily led by L/S Equity strategies, as investors’ hesitation gradually started to fade amid improving earnings reports, according to the latest Weekly Brief from Lyxor’s Cross Asset Research team.
EM-focussed strategies also rebounded while other strategies were modestly up over the week. Disappointingly, Special Situations strategies have failed to fully capitalise yet on the early signs of rebounds.
Lyxor says: “The high correlation across credit issues and reduced dispersion have constrained managers. However, the disconnection between falling equity prices and credit markets, as well as managers’ cautious exposures, have kept them reasonably isolated from the heat.”
“With the Fed normalisation set to continue, differentiation across credit segments should intensify. New opportunities will emerge for credit pickers. We remain overweight on the Fixed Income Arbitrage funds, and neutral on the strategies focusing on pure corporate credit arbitrage. The last quarter was difficult for both active and passive EM investors, due to escalating trade tensions.”
“While increased tariffs have had little impact so far on Chinese exports and U.S. importers’ margins, trade impacts are likely to intensify going forward. We don’t expect any progress until both sides are negatively impacted. This could happen when the U.S. starts imposing tariffs on the remaining tranche of imports. By then however, the U.S. peak in growth and lower substitutability of Chinese products would crunch pricing power and feed through to inflation. As for China, lower CNY and various stimulus would only partly offset its deceleration, and lead to a slowdown in GDP to 6.1 per cent in 2019 in our view. We believe the markets are now implicitly pricing in this scenario for EM markets.”
“The backdrop for EM managers should improve as downward pressure on assets recedes, and more opportunities arise from the winners and losers of the shifting supply chains.”