Philippe Ferreira

Philippe Ferreira

Director, Senior Cross-Asset Strategist

Lyxor Asset Management


L/S Equity Equipped To Navigate Turbulent Markets

22 May 2018

Investment Partners

Over the recent weeks, the return of risk appetite has been partly fuelled by wage growth and inflation data releases in the U.S., which came out below market expectations. Meanwhile the sharp rise in oil prices has lifted energy stocks, which, along with the recovery in IT stocks, have been key contributors to the rebound in risk assets in May, both in Europe and the U.S. 

The outlook remains however clouded by many uncertainties: Italian politics; the outcome of U.S.-China discussions on trade; asset price valuation; inflation and monetary tightening; dollar appreciation and its impact on EM sovereign credit… Based on these considerations, hedge fund managers have been reluctant to add risk in portfolios. Some funds increased their net exposure on a pure tactical basis in May.

On a month-to-date basis, hedge fund performance has been driven by CTAs and L/S Equity, including market neutral funds. L/S Equity funds remain one of the top performing strategies on a year-to-date basis, based both on broad and liquid benchmarks. The strategy has been able to secure the gains achieved in early 2018, while protecting against the losses in February and March. After mixed returns in April, in relation to a difficult earnings season with severe reactions on US equities and meaningful multiple compression, the strategy is delivering solid returns in May on the back of elevated exposures to IT stocks.

From the perspective of our investment recommendations, we have been at market weight on L/S Equity  and had expressed a preference for Fixed Income Arbitrage and Merger Arbitrage strategies (both at Overweight). The former has actually done very well, outperforming L/S Equity both on a quarter-to-date and year-to-date basis. But the latter underperformed on the back of the widening of deal spreads. Overall, L/S Equity appears very well equipped to navigate turbulent markets and we have a strong preference for funds with a variable bias, able to adjust their net exposure to fast changing market conditions.


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