Lyxor: Hedge Funds Gain 0.6% as CTA Surge Continues

Jul 11 2016 | 11:46pm ET

Hedge fund returns stayed in positive territory last week as the CTA winning streak rolled on, according to the latest edition of Lyxor Asset Management’s Weekly Brief.

The Lyxor Hedge Fund Index was up 0.6% for the period ended July 5, narrowing the measure’s year-to-date loss to an even -3%. All of Lyxor’s substrategies were either flat or in the green for the week, fueled by a 2.2% gain in the CTA Broad Index.

The fixed income bucket was the main contributor to positive CTA returns again this week, Lyxor’s research showed, as sovereign bond yields continued to fall. The equity and commodity buckets were profitable as well, as were further short positions against the pound. Meanwhile, the market’s sharp rebound meant that more directional strategies, such as long bias, special situations and long/short credit outperformed.

Lyxor’s Event-Driven Broad index gained 0.5%, the Fixed Income Broad Index 0.6%, and the Long/Short Equity Index 0.8% during the period. Global Macro was flat, reflecting continued fallout from Brexit-related positioning. 

For the year to date, CTAs lead the pack, up 4.3%, while the Global Macro Index is down the most at -6.4%.

Lyxor’s latest missive admitted that market developments after the Brexit referendum were somewhat puzzling. Risk assets rebounded as if nothing disruptive had happened, and equity indices have vaulted to new record highs, while credit spreads have narrowed in the US, in Europe and in emerging markets.

Yet contrasting pictures can be found, Lyxor stressed. Bond yields continued to fall to record lows in the developed world, with ten-year Treasury yields hitting record low yields and the German sovereign yield curve in negative territory up to 15 years. There is now a staggering $11.7 trillion in negative yielding debt, up $1.3 trillion rise in just one month, noted Lyxor.

“This environment continued to be supportive for CTAs,” said Philippe Ferreira, Lxyor senior strategist. “The strategy is now the best performer year to date, up 4.3%, and its positioning is geared towards a global deflationary spiral. We continue to believe that CTAs provide attractive portfolio diversification benefits, and maintain a slight overweight stance.”

“It is interesting to note that post-Brexit, hedge funds have significantly cut their equity beta,” he added. “[This] is reassuring, considering the near term uncertainty around the Brexit impact on the real economy, especially in Europe.”

“Our view remains in favor of hedge fund strategies with limited market directionality,” reiterated Ferreira. “It implies a preference for merger arbitrage versus special situations in Event Driven, a preference for variable biased and market neutral managers in L/S Equity, and a preference for Fixed Income Arbitrage versus L/S Credit.” 

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. More than 60 funds participate, representing $7.9 billion of assets under management and replicating $220 billion in AUM.

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