Jean-Baptiste Berthon

Jean-Baptiste Berthon

Senior Strategist, Cross Asset Research

Lyxor Asset Management


Macro Managers Are Scratching Their Head Just Like You

04 Jun 2018

Investment Partners

Europe took center stage this week, with further developments in the Italian political saga reminding investors that there are still powerful Eurosceptic forces at play and forcing them to end their hopes of meaningful eurozone reforms. However, fading prospects of another election in the near term are providing a respite. Spain is also entering a phase of uncertainty after Prime Minister Rajoy was forced out of office, but this is a minor issue compared with Italy. Concerns about trade quickly revived, as a result of the US’s imminent implementation of tariffs against most of its trading partners. The main risk would come from spiraling multilateral retaliation and the weakening of global trade organizations.

Hedge Funds were overall flat this week, emphasizing their appealing profile in the current environment. The Italian stress mainly hurt CTAs, hit in their long bonds. L/S Equity funds also suffered from derisking, in line with their cautious exposure. By contrast, Event Driven, away from the epicenter, proved resilient.

Markets will have to go on dealing with multiple uncertainties, including concerns about the continued integration of the eurozone, trade fears, a potential revival of risk linked to Iran later in the year, disappointing economic data everywhere apart from the US, a strong dollar still threatening some economies, and monetary normalization progressing in the US. Conditions are likely to remain challenging for most investment styles.

 

We wondered how Macro funds are dealing with this. Our bottom-up managers survey (see p2) confirms our top-down observations. The surging correlation across returns of a large basket of diversified Macro funds year-to-date tells us that they are facing the same drivers and that they struggle to find decorrelating arbitrages. Meanwhile, the low dispersion across their returns and their modest sensitivity to markets suggest that a majority of them are refraining from taking aggressive risk. Yet, we find that the alpha they individually extract has been increasingly volatile this year. This shows that they struggled to navigate without scars the minefield of uncertainties coming and going back and forth. As a result, they are flat or so year-to date.

 


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