Philippe Ferreira

Philippe Ferreira

Director, Senior Cross-Asset Strategist

Lyxor Asset Management


CTAs Withstand The Plunge In Oil Prices

16 Jul 2018

Investment Partners

There was an escalation of the trade war between the U.S. and China over the recent days as the former threatened to raise tariffs on another USD 200bn of imports from the latter. Yet, despite this, risk assets rebounded since end-June. Equities were fueled by solid macro data releases in the U.S., expectations of strong corporate earnings growth for the second quarter and signals that the U.S. and China are open to resume negotiations. In the fixed income space, yield curves continued to flatten, especially in the U.S. In parallel, commodities experienced tougher market conditions. The Brent oil price fell by 7% on July 11 in the wake of Libya’s National Oil Corporation announcing that it would resume oil shipments.

In the hedge fund space, most strategies benefited from the rebound in equity and bond prices. Strategies with an elevated market beta, such as Special Situations and L/S Equity, outperformed since end-June. Market Neutral L/S Equity funds underperformed during the same period, on the back of the momentum reversal in equities, which, as an aside, appears to have reached a floor.

Meanwhile, the sharp drop in oil prices was a drag on CTAs due to their long positioning. But losses were largely offset by gains on equities, fixed income and the USD. Moreover, CTAs started to trim their positions on oil over the course of June, when the momentum started to fade.

Trend following conditions remain challenging as the recent rebound in asset prices appears to be fragile. Investors’ appetite for risk is frozen by political risks such as multilateral trade wars and Italy’s renewed sovereign concerns. Overall, we maintain a neutral stance on CTAs and prefer mid to long term strategies, which can adjust their positioning faster according to market conditions. CTAs are attractive at this stage of the business cycle thanks to their low correlation to traditional assets over the long run. But the correlation to equities is currently more elevated than usual. Few managers managed to withstand equity reversals in Q1.


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