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<\/a>Risk assets have continued to edge higher over the recent weeks, with the MSCI World reaching new highs last week. Yet, equities in developed markets have been essentially fuelled by the U.S. market. The S&P 500 (price index) is now up 5.7% year to date (almost 45% annualized!) with a significant part of such returns having been achieved since February 9th, when the President promised a \u201cphenomenal\u201d tax plan. The rally has pushed
\nvaluations further into stretched territory. Based on Factset earnings estimates, the
\nForward 12-Month P\/E now stands at 17.7, a record since 2004. Meanwhile, economic
\nmomentum has picked up in Europe while political risk has increased ahead of key
\nelections in major countries.<\/p>\n
Faced with the challenge of balancing risks (U.S. stocks\u2019 valuation, political risk in Europe)
\nand opportunities (growth momentum), investors appeared to increase investments in liquid
\nalternatives. Based on Morningstar data, inflows into alternative UCITs rebounded
\nmarkedly at the beginning of 2017. At the level of individual strategies, Event Driven
\ncontinued to experience solid inflows while L\/S Equity Market Neutral still saw outflows last
\nmonth. Reversals in flows have taken place in the Global Macro (now seeing inflows) and
\nCTA space (now seeing outflows) and broadly reflect performance in Q4-16 (Global Macro
\nup and CTAs down).<\/p>\n
With regards to recent performance, the Lyxor Hedge Fund Index was up 0.4% last week
\n(1.8% month to date) and all the strategies were in positive territory. CTAs continue to
\noutperform month to date as a result of long allocations to equities and energy
\ncommodities. On a year to date basis, Event Driven managers lead the pack and all the
\nstrategies are up in excess of 1%.<\/p>\n
Going forward, we believe some profit taking makes sense on directional strategies after
\nthe recent rally. We, nonetheless, maintain our strong conviction on Event Driven and U.S.
\nL\/S Equity strategies. We believe U.S. tax reform should support alpha generation for stock
\npickers. Meanwhile, both strategies provide protection if political risk in Europe continues to
\nrise.<\/p>\n