The wheel turned in favor of directional strategies

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Encouraging October economic releases, speculation about
non-US central banks actions, and the re-risking of the smart
money helped to fuel a rally. The wheel turned in favor of Event
Driven and the longest bias L/S Equity. In contrast, CTAs
underperformed, hit on their long bonds exposure. Market Neutral
funds also suffered from factor rotations.

Within the L/S Equity space, Within the L/S Equity space, US long bias US long bias US long bias funds led the led the led the group,
while p while pressure ressure ressure fellupon the upon the upon the Market Neutral funds Market Neutral funds Market Neutral funds. After weeks of
bleeding, the longest bias funds staged a substantial rally,
especially in the US. It made up for most of the lost ground since
the end of August. Exposures were little altered over the period:
this was mainly a beta recovery.

In contrast, In contrast, the other sub the other sub the other sub-strategies o strategies o strategies only captured part of the nly captured part of the
bullish impetus bullish impetus impetus. The Variable bias funds, which had demonstrated
an impressive resilience during the sell-off, remained cautiously
exposed. By the end of October, they had only marginally rebuilt
their net exposures.

Market neutral endured a difficult month, hit by tw Market neutral endured a difficult month, hit by two rounds of o rounds of
market rotation. The first one started by the end of September, with
a severe turn in the Momentum factor. The second rotation – of
lesser violence – unfolded after the FOMC, which resulted in a
sector repositioning.

The loads of EPS releases published over the month were not a
key source of alpha. While better than feared, the US season
remained very macro driven with little stock discrimination. The
season in Europe (and to a lesser extent in Japan) proved more
challenging, with more disappointments. As markets gradually exit
this W-shaped episode, stock correlations are starting to recede.
This should help restore the alpha potential.

• Event Driven funds, main victims of the sell Event Driven funds, main victims of the sell , main victims of the sell-off, were prime off, were prime
  beneficiaries of the rally. beneficiaries of the rally. Special situation funds outperformed in
  October. Receding concerns about global growth, further easing
  expected from non-US central banks, and flows returning to the market altogether gave a strong lift to corporate situations. The
  recovery was particularly notable in the most liquid segments. The
  rally in spinoffs and IPOs was faster than in activist or in distressed
  positions. The healthcare sector continued to be a source of
  volatility. However funds shaved off their holdings in the sector, and
  in particular, few funds had meaningful exposure to Valeant. The
  recovery in Merger Arbitrage lagged, with several deals coming
  under regulatory scrutiny.

• The L /S Cr edit Arbitrage edit Arbitrage edit Arbitrage funds delivered flat returns delivered flat returns.
  Conservatively exposed, they didn’t benefit from the tightening of
  HY spreads both in the US and in Europe.
• CTAs’ long exposures ’ long exposures ’ long exposures in bonds ca in bonds ca in bonds came under pressure me under pressure me under pressure. The
  performance of the long-term models see-sawed over the month,
  paced by the volatility of energy contracts and by rates. US yields,
  which surged following the FOMC, were the primary detractor of
  performance. The rapid repricing of the US front curve was partially
  offset by gains in European bonds. These rallied following ECB’s
  hints at a possible action by December.

Currencies and equities were minor but positive contributors. The
overall dollar exposure of long-term models was gradually cut.
Instead, they held increasingly differentiated FX positions, including
short Euro and JPY (vs. USD), against longs in GBP. The equity
bucket was also mildly positive, as models gradually rebuilt their
long positions.

Faster in rotating their portfolios, short-term models outperformed
their long-term peers in October.

• Strong Global Macro Strong Global Macro Strong Global Macro returns, boosted by their long held dollars , boosted by their long held dollars
  and equities. and equities The month started on a positive note. Their gains
  from the equity rally more than offset losses in the FX and rates
  exposures. They actively rotated their bond exposures, which did
  not deliver substantial gains. However, the bulk of the P&L was
  achieved after the mildly hawkish FOMC. Their long held strong
  USD positions finally paid off. Their exposure to commodities
  remained limited in net exposure, most of their stakes being
  concentrated on energy relative value arbitrage.

“Therally is losing breath rally is losing breath rally is losing breath, providing fading support to , providing fading support to the most the most
directional L/S Equity and Event Driven directional L/S Equity and Event Drivenfunds. Our focus gradually . Our focus gradually
returns to the relative value and macro strategies. returns to the relative value and macro strategies.” says JeanBaptiste
Berthon, senior cross asset strategist at Lyxor AM.