Lxyor: Hedge Funds Start 2017 Flat As CTAs and Macro Funds Diverge

Jan 9 2017 | 6:15pm ET

Hedge funds were generally flat last week as the reflation trade took a breather amid lower volumes, according to the latest Weekly Brief from Lyxor Asset Management. 

Lyxor’s closely watched Hedge Fund Index gained 0.1% for the week ending January 3, the company said. Lyxor's CTA and Macro indexes were the outliers, losing 0.9% and gaining 0.8%, respectively. 

CTAs suffered from losses on U.S. yields and equities, while Macro funds gained on long U.S. bond/short Euro bond positions. 

For the year ahead, Lyxor expects less monetary accommodation, more fiscal push, and more policy ruptures to support an inflection point in rates and inflation. Greater dispersion, more typical asset relationships, and rising volatility might be the result, Lyxor said, all factors that would benefit hedge funds.

Nonetheless, the company expects the shift to be gradual, and reactions to be severe should it falter or eventually disappoint. A number of factors impairing alpha persist. Lyxor writes, but the backdrop did improve and has resulted in some repositioning in its 2017 market views.

“We would reweight U.S. L/S Equity funds, focusing on fundamental styles, as they would be the prime beneficiaries of improving alpha conditions,” noted Lyxor senior strategist Philippe Ferreira in the research note. “Small-cap funds are also worth exploring. We expect sector rather than stock alpha in Japan, which is still under QE constraints, and favor Variable over Neutral funds.” 

“We expect US corporate activity to heat up,” Ferreira continued. “We are overweight U.S. merger and Special Situations funds, which are well positioned on the reflation trade, yet not overly beta exposed. 

“Credit markets might not be the first domino to fall on rates, but they offer mixed beta and alpha, which is scarce. We favor multi-credit funds to benefit from dislocations.

“Macro funds would benefit from higher macro differentiation, but would still be constrained by political uncertainty. Expect greater fund return differentiation. CTAs' fate relies on the regime shift's pace - we are overweight on long-term models after their profound portfolio adjustment.

“Finally, we expect to increase our focus on volatility strategies by the second half of 2017,” he concluded. 

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 $8.4 billion of assets under management and replicating $220 billion in AUM as of November 30, 2016.

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