Risk assets mostly rallied in April after a modest sell off in
the beginning of the month and most hedge fund strategies
generated positive returns for the month. Economic data
continues to paint a picture of a mixed recovery with
disappointing data in Asia and Europe and shallow growth in
the U.S. Equity markets corrected about 5 to 10% in mid
April due to disappointing macro news but data in the
second half of the month rebounded slightly.
From a bottom up perspective, the Q1 earnings season in
the U.S. also firmed slightly from a weak start. Companies on
average beat EPS estimates by 6% whereas the pace was
closer to 3% at the start of the earnings season. Central
banks also reminded investors that accommodative policies
can be further eased if data remains weak. Risk assets rallied
after the Federal Reserve noted it may expand QE if the data
warrants it. The ECB was also more dovish than investors
expected.
Strategy-wise, L/S equity funds generated positive
returns in April and generally benefitted from the rally. Variable
and long bias strategies were up 0.4% and 0.6% respectively
benefitting from net long exposure to the market.
L/S Equity
Neutral strategies were up 3.9% and showed the best
performance in April. Correlation among stocks remains low
at about 30% and continues to provide a fertile environment
for stock picking on both the long and short side.
Additionally, earnings season is providing company specific
catalysts for additional dispersion.
Event driven strategies performed well with Merger
Arbitrage strategies up 1.5% in April, Distressed up 0.8% and Special Situations up 0.1%. Merger Arbitrage was helped by
the general risk on environment where deal spreads mostly
tightened. The pace of new deal announcements is
disappointing given the level of cash on company balance
sheets. Companies are generally focusing on returning
money to shareholders via buybacks and dividends instead
of making big acquisitions.
Credit funds generated strong performance with L/S
Credit Arbitrage up 1.3% and Convertible Bonds up 0.8% as
well. The compression of spreads and lower bond yields
continued in April which helped the strategies. New bond
supply is outpacing last year’s level as companies take
advantage of the low rate environment. This is highlighted by
Apple’s record bond offering at the end of April which was in
high demand despite the small premium over the risk free
rate. Net fund flows remained positive, with loan funds
continuing to see greater inflows than that of bond funds. In
structured credit, new CLO issuance tumbled in April as new
regulation was enacted that now requires banks to take a
larger capital charge for such assets (legacy CLOs are not
subject to the new guidelines).
Long term CTA strategies did well in April with the
average fund up 3.0%.
Long and medium term trends
persisted in many markets as equity prices climbed while
bond yields and commodity prices declined. Short-term
CTA’s performance was weaker with the average fund down
0.9%. Short-term strategies were hurt by seesaw price
swings in April caused by weaker than expected economic
data.
“Market reaction remains liquidity driven and hedge fund
exposures show that managers continue their constructive
positioning” says Stefan Keller, Head of Managed Account
Platform Research & External Relations at Lyxor AM.
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