Philippe Ferreira

Philippe Ferreira

Director, Senior Cross-Asset Strategist

Lyxor Asset Management


Market Neutral L/S Struggles As Momentum Stocks Take A Hit

10 Dec 2018

Investment Partners

Risk assets failed to reach a bottom early December despite the U.S and China agreeing to extend negotiations on trade at the G20 summit. The near-term outlook remains clouded with political uncertainties which prevent investors from adding risk in portfolios despite lower equity valuations and wider credit spreads. Going forward, the Federal Reserve meeting on December 18-19 will be critical to gauge whether its stance has effectively turned less hawkish after recent comments in that direction from FOMC voting members. We do think the Fed will adjust its stance and expect two rate hikes in 2019 from three in the dot plot at present.

 In the hedge fund space, the dynamics over the course of November remained similar than in October, though the damage was much more limited. Merger Arbitrage outperformed while L/S Equity as well as Special Situations strategies underperformed. Relative Value Arbitrage and L/S Credit strategies remained pretty much resilient despite the widening of high yield credit spreads in the U.S. and Europe.

 Market Neutral L/S Equity strategies were one area of disappointment in November. The strategy underperformed as momentum stocks suffered another hit. We have long highlighted the sensitivity of the strategy to the momentum equity risk factor over the long run. Our estimates suggest that such sensitivity, which was limited early September, rose markedly since then (see charts below). Based on a sample of 35 L/S Equity Market Neutral UCITs funds, the median performance is -1.6% in November, the worst performance is -9.1% and the best performance is 4.1%. Only 17% of the funds in our sample were in positive territory last month. Digging into the roots of the momentum headwind, we find that it has been highly vulnerable to the reversal in Technology stocks (see page 2). Finally, our views on the Market Neutral L/S strategy have been somewhat defensive. We maintained a neutral stance on the strategy throughout the year. Our lack of enthusiasm for the strategy reflects its perpetual vulnerability to momentum reversals. At the same time, we haven’t been recommending an outright underweight stance due to the benefits of low beta strategies in the current environment. Our stance remains unchanged, with a bias towards an upgrade at a later stage as risk appetite is likely to remain limited in 2019, in our view.


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