Jean-Baptiste Berthon

Jean-Baptiste Berthon

Senior Strategist, Cross Asset Research

Lyxor Asset Management

Looking for diversifying strategies ?

09 Apr 2018

Investment Partners

Amid mixed economic prints, confusion intensified this week with multiple gyrations in the tech sector and the release of detailed tariff threats on both the US and Chinese sides. Hedge Funds, about flat, remained resilient, though CTAs and FI Arbitrage underperformed.

In perspective, we see markets transitioning from goldilocks to late cycle. We still favor equities over bonds but risks are building up. At a time when the macro momentum is peaking, monetary normalization is accelerating and concerns about protectionism are intensifying. Meanwhile the pulse in European and Japanese reforms is yet to materialize and could be slowed by politics.

The coming quarter is likely to offer bumpier and modest beta contribution for hedge funds, all the more so constraints on alpha accentuated. While the coming quarter might be more difficult to navigate, hedge funds actually appear attractive relative to most other multi-strategy approaches.

We are currently positioned on hedge funds around three main axes: i) strengthen the allocation to diversifying styles, ii) still favor bottom-up over top-down strategies, focusing on deep-value and tactical funds, and iii) manage the overall beta exposure.

We find that hedge funds strategies’ sensitivity to equities remained stable over the recent years. Merger Arbitrage, L/S Equity Neutral, FI Credit and, overall hedge fund indices offer limited directional exposure.

By contrast, we observe that hedge funds strategies substantially re-correlated over the recent years, suggesting that macro and market conditions affect each style more than they did before. As of today, the most diversifying strategies within hedge funds allocations are the CTAs and L/S Equity funds.

We upgraded our stance on L/S Neutral, we remain O/W on Merger Arbitrage. We are still U/W on CTAs. We are also O/W Special Situations provided beta is reduced in other buckets.

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