Lyxor: Opportunity Set For Merger Arbitrage Looms Large In Q4/16

Oct 3 2016 | 10:44pm ET

Hedge funds ended the third quarter on a strong note, as strategies with higher betas continued to outperform, according to the latest Weekly Brief from Lyxor Asset Management.

The Lyxor Hedge Fund Index gained 0.3% in the week ended September 27. The measure ended the month down -0.1% and remained down -2.1% for the year through the end of the quarter. 

Gains in the month were fuelled by CTAs, which gained 2% and have returned to positive territory for the year to date. Long term models recouped the lost ground thanks to the tightening of global 10Y sovereign bond yields and their long positions on equities, according to Lyxor’s research.  L/S equity funds also posted healthy returns, up 0.5%, led by the longest and the most variable biased funds. 

On the down side, global macro funds continued to suffer, down -0.5% and now down -6.8% for the year. That said, dispersion in returns remained significant among managers, Lyxor noted, while the global flattening of yield curves proved costly for most of managers. 

“Heading into Q4, we believe that market conditions are likely to be less supportive than in Q3,” commented Philippe Ferreira, Lyxor senior strategist. “Key political milestones, renewed question marks about European banks, and the likelihood that the Fed will tighten in December may fuel market uncertainty. This comes on top of rich valuations across the board. 

“On the back of our cautious stance on risk assets, we have turned more defensive on L/S Equity strategies,” he added. “Our preference goes to managers with low net exposure and rather positioned on quality/low beta stocks. With regards to Event-Driven, we have Special Situations funds at slight underweight. The strategy has an elevated beta vs. the MSCI World (38%) and is thus sensitive to market downturns. It is also exposed to political risk, which has increased for the health care sector in the U.S.” 

“Finally, we reaffirm our stance on merger arbitrage at slight overweight. The strategy has benefitted in September from the completion of several high profile deals in portfolios and has increased its cash cushion. Net exposure to equities has decreased to 2016 lows…[and] with M&A activity running at full steam, we believe that the opportunity set is large while the risks are manageable.” 

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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