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Research

Not all L/S equity strategies are created equal

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Alternative strategies were fairly resilient during the first weeks of the market turmoil before cracks began appearing mid-March.

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Not all L/S equity strategies are created equal
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As of March 16th, most strategies except CTAs were down in a range of -5 to -10% month-to-date. Event Driven was down -10.6% in the first half of March (with Merger Arbitrage down -9.6%), Global Macro was down -7.4% (with Systematic Macro down -2.5%), L/S Equity was down -6.2% (with Market Neutral L/S down -2.3%), L/S Credit was down -4.4%. On a positive note, CTAs were up +0.1%, with elevated dispersion. Since March 16th, High Yield credit spreads widened further and L/S Credit strategies experienced losses. L/S Equity also suffered losses last week. On a positive note, CTAs were slightly up and some Merger Arbitrage strategies managed to post positive returns.

This week we’re focusing on L/S Equity, one of the strategies where we have observed the highest dispersion in normal times. During the first half of March (up to March 16th), our Directional L/S Peer Group was down -8.1%. The best performing strategies were up in +10% while the worst performing were down -30%/-40%. L/S Equity strategies weathered the first part of the market sell-off quite well. Up until March 11th, negative beta for the most directional managers was offset by strong alpha, which was driven by some favorable sector and factor exposure. The short book was also efficient. However, starting mid-March, performance deteriorated as market moves were amplified by deleveraging/risk control measures to reduce underlying volatility exposure. Large platforms and multi-strategy firms involved in systematic and statistical arbitrage strategies cut risk and deleveraged their books by 10 to 30% over a few days.

Even if L/S Equity managers started reducing beta before, equity downside capture was significant between March 12th and 19th. Negative performance was driven by crowdedness and short-to-medium term momentum exposure. In Europe, some local regulators announced short ban measures to limit selling pressure, first for one day then extended up to three months. This constituted some additional technical effects in certain countries, adding to the unprecedented standard deviation moves observed on March 18th in particular. Among the strategies that did well during those tormented times, you find portfolio managers with no or low beta and those who had some convexity positions in their books. Additionally, you also have managers tightly monitoring factor exposure to avoid factor rotations. The worst performers were equity managers with some multi-asset buckets, as well as deficient factor monitoring or hedging.

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