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The deflation and growth scares, which built up over the
summer, accelerated following the CNY devaluation. They
morphed into a vicious cycle in the last week of August. With
volatility reaching 55 and equities plunging by the hour, Monday 24
will from now on count among the major stress episodes used as
reference. The bulk of the Lyxor Hedge Fund index was endured
during that week. Event Driven funds were the main losers. Return
dispersion was elevated. Losses in some heavy-weight funds hid
decent performances among macro traders (CTAs and Global
Macro). A milder pressure on credit and govies supported credit
and fixed income arbitrage strategies. The L/S Equity space
proved resilient apart from Asian and US long bias managers.
To the notable exception of Asian and US long bias funds, the
L/S Equity strategy was remarkably resilient. Most funds had
steadily reduced their net exposures over the summer, cautiously
positioned ahead of the sudden end-of-August debacle. In Europe,
Variable bias managers implemented efficient hedging strategies,
with an increased number of single shorts. European managers,
which generally missed the reflation trade early this year, regained
all the lost ground over the summer. They even outperformed
market neutral strategies. In contrast, Lyxor Asian managers
suffered in August, down -2% in aggregate. Their dramatic cut in
net exposure since June (-10%) limited the damages. US Long
Bias also took a major hit, losing most of their beta.
Event Driven funds were the main losers, with a severe plunge
across the board. The aggregate Event Driven performance was
close to flat before the last week of the month. Until then, some
losses were recorded in China and Resources related exposures.
They were offset by positive earnings releases in few large
corporate situations and by the favorable closing of several M&A
deals. The last week of August unsettled both merger spreads and
the pricing of corporate situations, including activist positions.
Special Situation underperformed Merger Arbitrage funds, even
adjusted from their market beta. The sudden widening of deal
spreads and the depressed valuation levels of corporate situations
will probably open a phase of recovery going forward.
The Lyxor L/S Credit Arbitrage index was only down -1.5%.
The market turmoil infected credit markets but less than equities.
Spreads had already meaningfully widened over the recent
months. This kept managers on a very cautious footing, positioned
on high quality and high grade issues, with increased
diversification. As dispersion returned in the space, short
opportunities also emerged – and not only in the energy segment.
In particular weakening cross credit correlations provided fixed
income arbitrage funds with greater relative value opportunities.
The alpha produced by Credit strategies alleviated the adverse
beta contribution.
High dispersion among CTAs in August. CTAs were up nearly
+1% before the last week of August. With their long bond and USD
positions along with their short commodities exposures, they were
well hedged against the various risks being priced in. In particular:
a slower global growth, a slower Fed normalization and the
Chinese ripple effects on EM countries and resources. During the
last week, a majority of funds remained reasonably resilient.
However some heavy weight funds were substantially hurt on their
remaining long equity holdings and on some of their long USD
crosses. ST models outperformed thanks to a faster portfolio
repositioning. We observe that, in aggregate, LT models cut their
about 30% net equity exposure down to less than 10% over that
week.
Heterogeneous returns among Global Macro, with losses in
heavy weights. Until the last week of August the strategy remained
resilient, with a slightly positive MTD return. While cautiously
exposed to risky assets, their hedges had little efficiency in the selloff.
They were essentially hit in their equity and long USD positions,
with limited cushion from bonds or safe havens. However, losses
in large macro funds actually hide a more heterogeneous and
favorable picture. After the sell-off, Lyxor Global Macro funds were
on average 10% net long on equities (from 15% early August), with
more than half of their equity positions in Europe. They continue to
play commodities mostly in relative value. Overall they remain long
USD, especially against EUR and GBP.
“Beyond a possible near-term rally, we expect moderate and
riskier returns from traditional assets. Thus, we continue to
strengthen our focus on hedge funds’ relative value approaches.”
says Jean-Marc Stenger, Chief Investment Officer for Alternative
Investments at Lyxor AM.
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