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Lyxor Jean-Baptiste Berthon

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Macro Funds’ disconnect coming to an end, says Lyxor

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Hedge funds enjoyed another positive week last week according to the latest Weekly Brief from Lyxor’s Cross-Asset Research team.

Lyxor writes: “Cracks in the reflation trade emerged after the marginally dovish Fed’s minutes and with doubts intensifying about the tax-cut package. CTAs outperformed, thanks to their contrarian allocation in bonds (they are long, mainly in Europe), in FX (they are dollar short, especially vs. non-G10 currencies) and in commodities (they are long gold). They also benefitted from their more cyclical exposures to equities and metals. While sector rotations away from the reflation trade weakened L/S Neutral funds, equities remained well oriented, boosted by signs of a macro re-acceleration. It kept on supporting the diversified L/S Equity and Event Driven funds.
 
“This week, we focus on the Global Macro funds’ performance, which has been challenging to assess since mid-2016. Global Macro indices are in positive territory, but returns range from about flat to a high single digit (12M trailing). Moreover, the correlations across these indices collapsed, which suggests that they now respond to unrelated market drivers. Similar observations can be made at a single fund level.
 
“While they used to move in sync until mid-2016, Macro funds became very heterogeneous. Low economic and market volatilities, as well as rich valuations drove managers to explore a wider set of themes and with divergent exposures (see their scattered sensitivities to bonds and equities below). In particular, a majority of them favored relative trades across regions to exploit the diverging cycles. Given their heterogeneous positioning, the rapid unwinding of the reflation trade early this year translated into elevated return dispersion. However, the impact was mitigated by their overall cautious exposures, illustrated by the share of funds displaying limited return volatility.
 
“This episode of disconnect among Global Macro funds is transitory in our view. The current economic re-acceleration and the move toward monetary normalisation will result in more directionality and a more common set of market drivers. Funds’ correlation is already firming up.”

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