A Taste of Summer for Hedge Funds

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The winning streak for hedge funds continued last week with all strategies, besides CTAs,
benefitting from the stabilization of market conditions. The Lyxor Hedge Fund Index was up
0.5%, bringing the month to date performance to a solid 1.6%. Global Macro managers
outperformed last week, on the back of long positions on the US Dollar. Buoyant economic
data in the US has fuelled expectations that the Fed could start to reverse its very dovish
stance at the July 26-27th FOMC meeting.

Month to date, the Lyxor Hedge Fund Index is up 1.6% and strategies with more market
directionality benefitted the most from the market rebound. Both L/S Equity Long Bias and
Special Situations managers are up 3.3% month to date (as of July 19th). Cautious hedge
fund managers have swiftly adjusted upwards their equity beta in July. But the most
defensive managers lagged as the Brexit shock was offset by solid economic data
releases. Preliminary PMIs in the euro area in July actually suggest that economic activity
continued to be solid post-Brexit vote.

On a negative note, CTAs are down for the second week in a row. Rising sovereign bond
yields and some long exposures to the Turkish Lira vs. USD contributed to losses. The
CTA strategy remains nonetheless in the black month to date. We maintain an overweight
stance on CTAs, on the back of their strong portfolio diversification benefits and as a hedge
against downside risk that, in our view, remains significant.

Finally, the factor rotation in equities, which saw a reversal in momentum and a rebound in
value, has largely spared market neutral L/S managers. They are sensitive to the
momentum factor. The rotation has been stronger in Asia as a result of expectations that
Japanese authorities could adopt additional easing steps, both fiscal and monetary. The
rebound in Asian value stocks has proved supportive for some pan-Asian quantitative L/S
Equity managers after a challenging first half. We maintain an overweight stance on market
neutral L/S Equity funds on the back of the assumption that the factor rotation is behind us.
Except in Asia, we expect little additional upside for value stocks in the US and Europe.