March was dominated by political turmoil in Italy and the
specter of a bank run in Cyprus. The above-mentioned events
are signs that the European debt crisis is far away from being
solved. On the other hand, US economic momentum keeps
improving and by endorsing Kuroda as the new BoJ governor,
markets expect Japan’s economy to move to the tune of
Abenomics.
Markets proved resilient, despite the Italian turmoil and
Cyprus bailout. It seems that equities’ attractive valuations
outweigh the potential risks. Since Japan joined the camp of
aggressive monetary policymakers, investors are triggered to
turn towards equities. Developed markets generally
strengthened, led by a growth of 4.9% in Japanese equities,
shrugging off concern about European developments and
adopting a positive stance toward supportive US data. The fear
of financial stress was spread to Emerging markets that lost
about -2.2%. On the fixed income space, both safe-havens
and credit products performed. Credit spreads compressed
about -32 bps for HY. The Japanese yen continues to
depreciate while USD gained against EUR on the ground of
political developments. Commodities are back into the positive
performance zone and volatility retraced from the previous
month’s increase.
Hedge funds appreciated again during March, fueled by the
ongoing normalization of market structure and modest but
positive growth prospects. However, the Cyprus crisis weighed
on risk appetite over the month, especially on European
markets.
L/S Equity funds still outperformed the overall space of
hedge funds. L/S Equity Long and Variable fund managers
showed optimism regarding the reward of beta. They
maintained their exposure on equities on the back of supportive
valuations, decent economic growth, and still deployed excess
liquidity. In that environment, the upward trend in risky assets on
a global level was not expected to end soon. The L/S Equity
Long and Variable Bias indices returned 1.41% and 0.40%
respectively. On the other hand, L/S Equity Market Neutral and
Statistical Arbitrage fund managers still enjoyed a trading
environment where correlations have come down, stock
dispersion is picking up and volatility remains at manageable levels. L/S Equity Market Neutral and Statistical Arbitrage funds
gained respectively 0.36% and 0.82%.
Event Driven hedge funds slightly appreciated over the
month. Distressed securities funds performed through credit
investments in financial and energy names. The Lyxor
Distressed Index registered a 0.99% gain this month. Special
Situations managers suffered mainly from positions in the basic
materials and government sectors. However, the Lyxor Special
Situations Index registered a 2.09% gain over the month.
Events on M&A deals were muted and merger arbitrage
managers mainly gained on the spread fluctuations. The Lyxor
Merger Arbitrage Index registered a 1.14% advance in March.
In the fixed income space, Credit related strategies were the
most affected by negative developments in the Cyprus bailout
case, bringing some volatility on European and, more broadly,
global markets.
Emerging credit managers were the main losers
due to their high beta exposures. Finally, spreads on European
credit default swaps slightly improved on peripheral countries
during the last week. Specifically, Greek bonds improved, while
emerging sovereign bonds posted mixed performances. The
Lyxor L/S Credit Arbitrage Index lost -0.51% in March.
The L/S Convertible thematic benefited from the continuous
upward trend experienced in the equity space and from the
decent performance of credit markets.
On the other hand, volatility declined on both U.S. and European equities, and the primary market was very active. The Lyxor Convertible Bonds Arbitrage Index yielded 0.99% over the month.
Global Macro strategies recorded mixed performances, with
a negative contribution of their commodity exposures which
offset the positive exposures to FX and bonds.
Additional
losses came from the funds’ largely shared long positions in
Western Europe equity indices, as a result of the situation in
Cyprus. The Lyxor Global Macro Index lost -0.14% over the
month. Long term CTAs ended the month in positive territory
thanks to their equity exposures. Long Term CTAs’ managers
have increased their equity exposures over bonds in risk
allocation terms since the beginning of the year. The Lyxor CTA
Long Term Index advanced 1.02% in March. By contrast, high
frequency funds still posted mixed performances.
“Despite the European political and economic turbulences
in March, hedge fund managers continue to focus on the
encouraging macro news flow generated in the US and the
upward trend in risky assets is not expected to end soon ” says
Stefan Keller, Head of Managed Account Platform Research &
External Relations at Lyxor AM.
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