Lyxor: Hedge Fund Index Dipped Slightly on Eve of Election

Nov 15 2016 | 12:45am ET

Hedge funds were slightly down in the week immediately preceding the U.S. election, although positioning suggests CTAs were hit hard while global macro returns were widely dispersed and long/short equity, event-driven and long/short credit managers likely navigated the market’s reaction to Donald Trump’s upset victory successfully, according to Lyxor Asset Management’s latest Weekly Brief.

The Lyxor Hedge Fund Index fell 0.4% for the week through November 8, with three strategies out of five posting negative returns. The measure is now down -2.2% for the year to date.

Overall, dispersion among strategies was low, Lyxor said. Strategies with low directionality posted losses: Event-Driven fell -0.6%, merger arbitrage -1%, and L/S Equity market neutral -1.5%. On the other hand, Fixed Income strategies were up +0.4%, supported by gains in U.S. high yield.  CTAs were flat, both in the long term and short-term segments. 

Although comprehensive data on hedge fund performance in the period since the election, Lyxor’s estimates suggest the following:

  • Long term CTAs were down as losses on their long fixed income positions were only partially offset by gains on long equities, long USD and long energy in commodities. 
  • Global Macro experienced a wide dispersion in returns. Some strategies that were long EM currencies (MXN in particular) experienced losses in the range of 2- 3% over the recent days. Meanwhile, managers that were short duration in fixed income were up and some managers investing in equities were flat as gains on longs on European and Japanese indices were offset by losses on shorts on U.S. indices. 
  • Within L/S equity, long-biased managers benefitted from the market rally as well as from positions on health care stocks. On the other hand, emerging market L/S specialists are down in the order of 2% on the day of the election and are deleveraging quite aggressively. 
  • Event Driven strategies marginally benefitted from their exposure to health care stocks, but overall, their lower net exposure ahead of the election likely prevented them from joining the market rally. Implications for the strategy are rather long term and could be positive to the extent that the march towards tougher regulations might be stopped. 
  • L/S Credit and Fixed Income Arbitrage were resilient in front of higher bond yields. We estimate L/S Credit funds were down 8 to 15 bps on the day of the election. 

“Cyclical sectors have done better than defensive sectors, except health care stocks, which have done well,” noted Philippe Ferreira, Lyxor senior strategist. “Coupled with the possibility that the Trump administration will implement protectionist trade policies, expectations of fiscal stimulus are leading to a sharp repricing of bond yields.”

“Investors played the reflation trade and we witnessed a significant rotation into mining, infrastructure and financials while technology names got clobbered,” he added.

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. Participating funds represent $7.2 billion of assets under management and replicating $220 billion in AUM as of September 30, 2016.

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