Lyxor: Hedge Fund Index Dips 0.8% on CTA Reversal

Sep 20 2016 | 11:08pm ET

Hedge funds slipped during the week ended September 13 as market concerns about the Fed’s timing and increasing uncertainty about the presidential election negatively impacted both equity and bond markets, according to Lyxor Asset Management’s Weekly Brief

The Lyxor Hedge Fund Index fell 0.8% during the period and is down -2.8% for the year to date, the company said. Overall, The dip was a rather mild movement when compared to the 2.6% loss registered by the MSCI World Index and the 1.6% loss registered by 10-year Treasury bonds, Lyxor noted. 

CTAs were hit the hardest, falling by a material 5.8% as they were largely net long both stocks and bonds at the start of the month. For the year to date, CTAs have dipped back into the red and are now down -2.7%. The drawdown on equities and bonds, an unusual positive correlation, has caused losses CTA funds comparable with previous episodes of jumping correlations in Q2-13 and Q2-15. 

Lyxor’s L/S Equity Broad Index was also down, falling -1.5%, although market neutral players were flat to slightly positive. Event-driven managers were flat, Lyxor said, and the company’s Event-Driven Broad Index is now the best performing strategy in 2016 at +1.7%. Global Macro, meanwhile, rose 0.5% on the back of short duration stances and long USD positions.

“While we believe that the Fed is unlikely to hike rates on Sept. 21st, any hawkish stance is likely to lengthen the bond market correction,” said Philippe Ferreira, Lyxor senior strategist. “Since 2010, bond markets experienced three major corrections: 2010, 2013 (the taper tantrum) and 2015. 

“On average, the 10-year Treasury lost 7% during these periods, and the selling lasted for 44 days from peak to trough. Recent bond market movements are, thus, comparatively mild. But on top of the FOMC meeting, Trump’s election campaign entails expansionary fiscal policies that could exacerbate bond vigilantes’ concerns in case he continues to catch up in polls,” he said.

“As a result, we have tactically cut the investment recommendation on long term CTAs to neutral from slight overweight, and upgrade short-term CTAs to slight overweight from neutral,” Ferreira added.

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. Participating funds represent $7.5 billion of assets under management and replicating $220 billion in AUM as of August 31, 2016.

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