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The gradual stabilization in oil prices, sparks of economic
improvements in Eurozone and multiple evidences of central banks
efforts all contributed to ease deflation fears. It triggered a broad
and rapid rotation in most of the assets and sectors tied to the
themes which dominated over the last few months. Recovering risk
appetite supported strategies most exposed to risky assets, in
particular the Event Driven and the L/S Equity Long Bias funds.
Short term CTAs’ models also strongly benefitted from the market
trends rapidly emerging. Conversely, L/S Equity Market Neutral and
longer term macro funds endured temporary turbulences.
The Lyxor L/S Equity Variable and Long Bias funds were up
+0.5 and +2.6% respectively. US funds outperformed and
generated the greatest alpha, in particular through their exposure to
the energy, financial and healthcare sectors. European focused
funds remained cautious. Following a number of false dawns and
real scares, they only gradually participated in the rally in Eurozone.
Over the month they materially raised their allocation to industrials
and mid caps, while taking profits on the consumer sectors and to
some extent on financials. These changes were consistent with
greater confidence toward the economic dynamic in the region,
while taking profits on the oil and QE trades. EM focused funds
produced returns in line with their underlying market, flat over the
month. By month-end their aggregate exposures displayed a
dominant allocation on Asian cyclical sectors.
The Lyxor L/S Equity Market Neutral index was down as much as –
0.9%. The reversal in themes which dominated these last months
(the oil scare, the deflation fear and EU de-risking) resulted in a
substantial and rapid sector rotation out of the defensive sectors
into cyclical stocks. The ones without sector neutrality
underperformed the most.
The recovery in Event Driven funds accelerated in February.
The drivers that played so severely against the strategy in the
second half of last year were powerful contributors to their recovery
in February.
Merger arbitrage funds were the first ones to rally,
primary beneficiaries of resuming investors’ risk appetite. A
meaningful deal spread tightening and completion of some
operations contributed to the strong returns. An honorable load of
new announcements allowed funds to refresh their portfolios. Of
note, the Valeant acquisition of Salix ($14.5bn) or the purchase of
Hospira by Pfizer ($17bn). They were up +2.6% over the month.
Special situation funds were up as much as +5.3% on average.
They benefitted from a strong tailwind supporting activist positions.
The Dow, Hertz, or Walgreens positions, which got under strong
pressure during most of last years’ H2, were strong contributors.
While most managers cut the lion’s share of their energy exposure over the last months, their residual positions (less than 10%) were
yet a significant contributor to performance. These benefitted from
a stabilization in oil prices and in the energy credit sector. Lower
liquidity pressure and risk appetite also reached out to distressed
funds, boosted by a clear cut rally in leveraged loans, HY and
distressed bonds. In particular exposures to General Motors,
Pinnacle and MBIA all rallied strongly.
The Lyxor L/S Credit Arbitrage index was up +1.4%. Most
funds were supported by a recovery in global credit markets.
Substantial inflows poured back into the space. Easing concerns
on deflation and a stabilization in oil prices gave some air to both IG
and HY markets – especially in the non-energy segments. Funds
focusing on European markets outperformed. They benefitted from
the ECB’s QE prospects being priced in periphery spreads. They
also extracted alpha out of the Greek situation, though with
volatility. The intensifying Fed debate ahead of the March FOMC
weighted on EM credit in the early part of the month.
The drivers for the strong performance of the Convertible Arbitrage
Strategy were similar. The easing pressure on liquidity, tightening
spread and rallying equity markets provided strong tailwinds. The
stabilization in oil prices had a strong impact on HY convertibles.
Primary markets rebounded after several months of poor activity,
positively contributing to the strategy’s return. Funds focusing on
Europe also benefitted from the ECB reflation being priced in.
The Lyxor CTA Long Term Index was down -0.2% over the
month. The thematic reversal in oil, inflation and growth stances
resulted in substantial losses in their fixed income and commodity
exposures. These were only partially offset by their long equity
positions. A pause in the USD strength also detracted
performance. The last week of February saw renewed weakness in
oil and yields. This allowed LT models to recoup most of the lost
ground.
In contrast, ST models quickly captured the trend reversals
unfolding over the month and outperformed not only their long term
peers, but all other hedge fund strategies.
Global Macro funds tend to be adversely impacted by turning
macro themes. However, they were only marginally unsettled by
that of February. A majority of them were adequately positioned for
an inflection in yields. Their long equity positions balanced losses
recorded in commodities (both in energy and precious metals).
Funds focusing on commodities underperformed multi-strategy
and quantitative funds. Sovereign Fixed Income Arbitrage funds yet
again recorded strong performance, boosted by reflation initiatives
announced by multiple central banks.
« It’s now time to be selectively directional, in reflation zones
especially. Global FX and rates , likely to be the most active playing
fields, would also offer appealing trading opportunities.», says
Jean-Marc Stenger, Chief Investment Officer for Alternative
Investments at Lyxor AM.
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