Lyxor: Hedge Funds Resilient Despite Headwinds

Hedge funds stayed resilient despite a return to risk-off sentiment, outperforming broader market benchmarks for the week ended May 17, 2016, according to Lyxor Asset Management’s latest weekly briefing.

The Lyxor Hedge Fund Index dipped a mere -0.1% during the period, compared to a -1.2% loss in the MSCI World index. Event-driven funds led the charge, up 0.1%, while CTA’s underperformed again, down -0.4%. For the year to date, Lyxor’s index is down -2.8%.

Global risk appetite has faded away as concerns over the strength of the global economy resurfaced and the Brexit risk is getting closer, Lyxor’s research suggests. Equity volatility rose a notch, in particular in the U.S. and to a lesser extend in Europe. However, it remains far below the levels experienced at the beginning of the year, Lyxor noted, and although global equities are down month to date, elevated dispersion in returns remains a support for L/S equity stock pickers.

The recent outperformance of hedge funds reverses a trend that saw the industry underperforming risk assets in April. Interestingly, the hedge fund strategies that underperformed year to date are those that are recovering at present, namely Event-Driven and L/S Equity, Lyxor said. In parallel, CTAs continue to face headwinds and are down 0.6% since the beginning of the month.

“We believe that the Fed is unlikely to hike rates as soon as June,” noted Lyxor senior strategist Philippe Ferreira in the report. “Inflation remains low and economic slack, as measured by capacity utilization, remains significant. However, in a context where base effects in energy prices will soon translate into upward pressures in consumer price indices and bond yields, investors looking for safe assets may struggle to find opportunities. 

“Investors remain caught between a rock and a hard place - volatile equities, expensive fixed income,” Ferreira continued. “This should fuel demand for alternatives, especially if the performance of hedge funds continues to improve as we expect.”

Lyxor’s Weekly Brief aims to identify trends in hedge fund investing while leveraging the proprietary information accessible through the company’s managed account platform.

Lyxor’s Hedge Fund indices are based on the universe of funds available on the platform determined on a monthly basis to be eligible for inclusion. Approximately 62 funds participate, representing $8 billion of assets under management and replicating $241 billion in AUM.