Lyxor: CTAs Continue to Stand Out

Aug 8 2016 | 9:39pm ET

European banks pulled back again after the European Banking Authority released stress test results. The worst performers such as Italy’s Banca Monte dei Paschi revived solvency worries, though the overall picture looked resilient compared to ECB benchmarks, according to Lyxor Asset Management’s latest weekly briefing.

Investors reacted further when a few large banks missed profit estimates. U.S. equities lost some ground but proved more resilient than their Eurozone counterparts as the Fed kept its dovish stance and S&P 500 companies continued to report positive earnings surprises in aggregate.

Low directional strategies fared better in that risk-off environment. Within Event Driven strategies, Merger Arbitrage outperformed Special Situations. The rally in momentum names across all regions helped L/S Equity Market Neutral and Variable Bias outperform Long Bias funds. The overall L/S Equity strategy was resilient.

Global hedge fund performance was distorted by Global Macro managers which took a severe hit from their long allocation to USD. The U.S. dollar sharply depreciated amidst the Fed’s status quo and mixed U.S. economic data (weaker Q2 GDP than expected, ISM reports).

Long Term CTAs outperformed. The recent fall in oil prices, seemingly supported by the unwinding of long speculative positions, was the main contributor. Long allocation to the Japanese yen versus the U.S. Dollar was rewarding but the Japanese bond sell-off partly offset the gains. Japanese assets reacted strongly when the Bank of Japan unexpectedly left the door open to large changes in September, including the possible end of negative interest rate policy. Furthermore, the new fiscal plan failed to live up to market expectations. Finally, the appreciation GBP was a detractor last week.

However, Sterling depreciated after the BoE slashed its growth forecast for 2017 and unleashed a sizeable easing package on August 4. The BoE cut interest rates to 0.25% and expanded its QE. Though we believe that GBP depreciation is well advanced, downside pressures could resume, supporting CTAs’ and Macro managers’ short positioning on GBP. Within the hedge fund space, we continue to prefer strategies with moderate market directionality such as L/S Equity Market Neutral and Merger Arbitrage. We keep a slight overweight stance on CTAs as a diversifier in portfolios and a hedge against market stress.

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. Approximately 62 funds participate, representing $8 billion of assets under management and replicating $241 billion in AUM.

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