Jean-Baptiste Berthon

Jean-Baptiste Berthon

Senior Strategist, Cross Asset Research

Lyxor Asset Management

Micro Strategies Outspaced Macro Traders

15 Feb 2017

Investment Partners

  • The Lyxor Hedge Fund Index was slightly down (-0.3%) in January, with 7 out of 10 Lyxor indices in positive territory.
  • Micro-focused strategies outperformed Macro traders. Event Driven delivered strong results on the back of buoyant M&A activity in the U.S. and positive surprises in corporate earnings. CTAs and Macro managers suffered from the depreciation of the dollar.

After a strong year-end, reflation trades started the year consolidating. Uncertainties regarding Trump’s priorities, the cohesion between the White House and the GOP, and the actual implementation of the key measures led markets to unwind part of the reflation trades. In Europe, the economic recovery gained momentum, thanks to rising household confidence, business activity and inflationary pressures. As a result, the spread between US and German ST and LT yields emphasized less economic and monetary divergence. It led the USD to depreciate against the EUR. Equities echoed the FX moves: up in the US, down in Europe. EM markets staged a rally. High Yield spreads tightened, in particular in Europe. Oil prices continued their downward trend while gold edged higher.

The Lyxor Hedge Fund Index was slightly down in January, dragged down by the underperformance of long term CTAs. On a positive side, Event Driven and Fixed Income arbitrage outperformed.

Fixed Income Arbitrage and L/S Credit funds were supported by both alpha and beta components. The rise in bond yields created arbitrage opportunities, while the tightening of High Yield spreads was helpful. According to Moody’s, default rates for speculative issuers in 2017 are expected to decline in the U.S. and to remain low in Europe, a tailwind for relative value players.

Heating up U.S. corporate activity boosted Event Driven, in the pharmaceutical sector especially. Actelion, the top long exposure of Merger funds, was the main contributor. The share price rallied 20% in the wake of the announcement of a $30bn deal by Johnson & Johnson. However, gains did not compensate for losses endured by positions on Rite Aid, a retail pharmacy chain targeted by Walgreens Boots Alliance. The share price took a nosedive in January, on the back of antitrust concerns and after the merger price was negotiated down. On the flip side, Special Situations outperformed, benefiting from positive surprises in corporate earnings, including Sherwin-Williams and Baxter International. Investments in the communication, basic materials and consumer non-cyclical sectors also paid off.

L/S Equity displayed disparate returns depending on the managers’ style and region-focus. European variable biased funds outperformed while the strong rally in momentum risk factor helped neutral funds perform well. In the U.S., funds turned more directional, which contrasted with the cautious stance of their European and Asian peers. The alpha backdrop remained conducive in the U.S. but less than in the aftermath of Trump’s election. Stocks pickers would benefit from the fall in correlation across sectors even if the stock dispersion became more modest.

Global Macro started the year slightly down, while dispersion across managers’ returns rose a notch. They currently favor relative value trades with a tilt toward the USD, Europe and Japan. Their significant long exposure to USD (vs. short G10 currencies and long EM currencies) was detrimental. Managers were moderately positioned on other asset classes, except for European bonds (unanimous short stance). In that regard, the rise in European bond yields supported most funds. Sovereign fixed income arbitrage managers outperformed directional funds, in particular those having a constructive view on European and Japanese equities.

CTAs’ drawdown came from the reflation trades, on which they are directionally exposed (roughly put, they are “long Trump and long Fed vs. ECB”). Both their long USD crosses and short bonds in most regions (except in Europe) proved costly. Meanwhile, the fall in commodity prices and the rebound in gold prices weighed on performances. Gains made on longs US equities did not help compensate for losses endured in Europe and Japan. Going forward, CTAs’ fate continued to be tightly linked to the pace of the reflation trades. At the end of the month, models were neutral on US bonds and slashed their positioning on USD.

“The Q4 earning season is seeing a material recovery in most regions and in a majority of sectors. However, trading volumes and stock returns following earnings report were moderate. A sign that investors expect further evidences of the global reflation. The alpha environment is not as strong as it was in the aftermath of the US elections, after stock dispersion receded. But low stock correlations and a greater focus on company specifics remain supportive for active managers, and fundamental stock pickers in particular.”Jean Baptiste Berthon, Senior Cross-Asset Strategist, Lyxor Asset Management

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