Philippe Ferreira

Philippe Ferreira

Director, Senior Cross-Asset Strategist

Lyxor Asset Management


How Hedge Funds Fared During The October Turmoil

29 Oct 2018

Investment Partners

The equity market sell-off reignited last week, with the S&P 500 down 3.1% in a single day. At the close on Oct 25th, the MSCI World was down 7.6% this month and had turned negative year-to-date. As bond yields fell, the correlation between equity and bond returns is back in negative territory, which supported diversified strategies. High Yield credit stayed put in total return, both in euro and USD. The sell-off, which started on concerns over U.S. overheating/ rising bond yields, evolved into fears earnings growth may fall faster than expected in the U.S. As the earnings season unfolded, some companies reported profit warnings/negative guidance for the coming quarters, in some cases related to trade wars and China’s growth deceleration.

Hedge fund performance was dragged lower last week by high beta strategies such as L/S Equity and Special Situations. Low beta strategies such as Merger Arbitrage, Relative Value Arbitrage, L/S Equity Market Neutral and CTAs outperformed. On a month to date basis, CTAs also underperformed due to the trend reversal across asset classes earlier in the month. But trend followers were largely spared by the sell-off last week.

Based on a sample of 192 liquid funds with data up to October 24th, we provide a deeper perspective on the impact for hedge funds of recent market developments. The overall picture is similar to the one provided by liquid hedge fund benchmarks. L/S Equity and Special Situations strategies were the most negatively impacted by the selloff in October due to their elevated beta. Low beta strategies discussed above outperformed while CTAs stood in between. As usual in such market conditions, there were outliers: we saw a Global Macro strategy up 17% month to date, a short-term CTA up 7% and a L/S Equity strategy up almost 5%. The worst performing strategy was a global L/S Equity, down 13.5%.

Going forward, we think that equities are unlikely to enter a bear market in the medium term. But the volatility regime is set to remain high next year. As a result, alternative strategies appear attractive relative to traditional asset classes. Merger arbitrage is one of our strongest convictions for the long run. Meanwhile, CTAs and Market Neutral L/S are now fit for bearish investors expecting a looming recession in the U.S. Finally, variable biased L/S Equity strategies may protect portfolios in downturns and capture eventual market rebounds. Such a strategy on our platform was down 20bps month-to-date (up to September 23rd).


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