Lyxor: Disappointing U.S. Growth Figures to Fuel CTAs

Aug 1 2016 | 8:54pm ET

Hedge funds gained from a robust return to risk assets in July, according to the latest edition of Lyxor Asset Management’s Weekly Brief, as directional strategies outperformed. 

The Lyxor Hedge Fund Index gained 1.6% for the month, with virtually all of the gains coming in the first three weeks. The measure was flat for the week though July 26. Counting July, the index has narrowed its year-to-date loss to a flat -2%.

For most of July, concerns over the U.S. economy and the fallout from Britain’s Brexit led waned, resulting in a sharp rebound in risk assets. In particular, the value segment of equity markets outperformed while momentum stocks underperformed, Lyxor said. directional hedge fund strategies such as L/S Equity long bias (+3.8% in July) and Special Situations (+4.1%) did well. 

Defensive strategies, meanwhile, underperformed. CTAs, which performed so well at the start of the month, faced losses from their long fixed-income positions, while Global Macro struggled towards the end of the month as a result of FX and relative value trades.

Despite the pressure on CTAs, the segment still booked an 0.7% gain for the month and remain ahead the most this year to date, up +2.8%. The only other strategy segment in the green YTD is the Lyxor Event-Driven Broad Index, up 0.4%. Otherwise, the Global Macro index is down -5.1% YTD, followed by a -3.2% loss in Long/Short Equity. In contrast, the S&P 500 is up 4.4% so far this year. 

“Going forward, there are signals that the market rebound is running out of steam,” said Philippe Ferreira, Lyxor Senior Strategist. “The recent fall in oil prices is a signal of global growth concerns. As an illustrative example, the U.S. economy grew at a disappointing 1.2% rate in Q2, well below the 2.5% rate expected. Growth figures for Q1-16 were also revised down from 1.1% to 0.8%."

"As a result, our outlook for hedge fund strategies remains unchanged," he added. "We maintain an overall cautious stance, which involves an overweight position on L/S Equity Market Neutral, Merger Arbitrage and CTAs." 

Moreover, Ferreira believes the underperformance seen in CTA strategies over the past few weeks will reverse. “We expect that the underperformance of CTAs in July will come to an end in the near term,” Ferreira added. “Their aggregate short USD position, which was not rewarding in July, is likely to generate gains going forward as the Fed stance may remain dovish for longer.”

Lyxor’s Weekly Brief aims to identify trends in hedge fund investing while leveraging the proprietary information accessible through the company’s managed account platform.

Lyxor’s Hedge Fund indices are based on the universe of funds available on the platform determined on a monthly basis to be eligible for inclusion. More than 60 funds participate, representing $7.7 billion of assets under management and replicating $220 billion in AUM.

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