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Bringing you news, views and analysis since 2013
Lyxor Philippe Ferreira

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Macro and CTAs outperform as the Dollar climbs higher, says Lyxor

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The last month of 2016 saw risk assets climbing higher, as part of expectations that the new US administration will remove barriers to growth and investment.

December also saw the Fed hiking interest rates but the impact on the fixed income asset class was rather muted.
 
This environment was supportive for hedge funds, with the Lyxor hedge fund index up 1.3 per cent in December, led by global macro and CTA managers.
 
Macro specialists benefitted from both exchange rate movements and equity allocations. Their short stance on the EUR, GBP and JPY vs. USD was rewarding considering the fact that the dollar continued to edge higher against most currencies. Meanwhile, their preference for European and Japanese equities was also a source of gains as both markets outperformed US equities in December.
 
On a negative note, L/S equity managers underperformed other hedge fund strategies in December. Their stronger allocation to cyclical stocks was not rewarding as defensive sectors recovered. L/S equity managers have significantly decreased their exposure to consumer non cyclical stocks over the course of December while adding to financials and energy companies.  
 
For the full year of 2016, event driven strategies outperformed. They benefitted from falling deal spreads and also from the fact that there was also no major deal break. Merger arbitrage strategies outperformed special situations funds, according to Lyxor indices.
 
Lyxor’s Philippe Ferreira says: “Going forward, we believe that hedge funds could experience a better environment in 2017 compared to 2016, which was a challenging year overall. The new US administration is aiming at extending the economic cycle with supportive fiscal measures and the removal of regulatory barriers to investment. Meanwhile, we expect the Fed to stay accommodative overall and both bond yields and energy prices to remain supportive for growth. There is thus room for improved economic expectations to be met.
 
“As a result we have re-weighted CTAs to slight overweight. Their sensitiveness to bond yields has decreased materially, while their stronger allocation to equities means they would benefit if Trump’s reflation hopes do not get disappointed. In parallel, we maintain an overweight stance on event driven managers and a cautious stance on L/S credit managers whose potential to generate performance appears to be more constrained.”

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