Lyxor Asset Management

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Bottom-Up Strategies Outperformed

• The Lyxor Hedge Fund Index was down -1.07% in April, with 7 out of 10 Lyxor indices in positive territory.
• Bottom-up strategies outperformed, supported by the improvement of the alpha backdrop. On the negative side, macro strategies suffered ahead the French elections.

All eyes turned to the French elections. Hedging dominated most European markets until the first round. The fading threat of a Frexit helped unwind most of the existing risk premium. Within the first week after the results, European equities staged a strong rally with banks leading the pack, and the EUR strengthened in line with German 10-year yields. The gold, which played its role of safe haven ahead of the French elections, finally receded. In the commodity space, oil prices witnessed another rollercoaster month on disappointments over the rebalancing timing of the energy market.

The Lyxor Hedge Fund Index ended the month on the negative territory -1.07%. It was essentially hampered by the underperformance of Global Macro and CTA managers on the back of political concerns in Europe. On the positive side, micro strategies outperformed. The improvement of the alpha backdrop supported Event Driven and L/S Equity long bias managers.

Event Driven shined in April. Merger Arbitrage managers thrived from their M&A positions. After a lengthy battle between Abbott Laboratories and Alere, the merger proceeded on a renegotiated price. It pushed Alere’s shares by more than 15 % on a single day. The bidding war over the generic drugs producer Stada was rewarding as well. Other deals paid off, including Whitewave Foods / Danone, NXP / Qualcomm and Syngenta / Chemchina. Special Situations funds recorded healthy gains on various investments, benefitting from better than expected companies’ earnings. On top of that, Whole Foods’ share surged after the activist investor Jana Partners took nearly 9% in the company and suggested putting itself up for sale. Finally, managers caught up part of the end-of-period rally through their European investments.

The longest biased funds led the pack within the L/S Equity strategy. Yet, hedges implemented on their portfolios limited the upside after the French elections. European managers navigated political worries with protection layers. Although they maintained their global net exposure, they reduced financials and EU-domestic stocks positions. Additionally, they reinforced the defensive sectors and moved toward non-EU/EMU European markets. They also maintained their shorts on indices futures implemented back in November 2016. Expensive valuation and doubts over the sustainability of the US economic cycle drove US managers on a more cautious stance. Robust consumption trends led them to rotate part of their allocation towards domestic and consumer sectors.

Political concerns in Europe weakened Long-Term CTAs’ performances. In the first part of the month, most of their losses stemmed from their long equities. Yet, long European bonds and short EUR alleviated damages. Thereafter, they regained part of the lost ground. Their fresh long energy at a time when oil prices came under renewed pressure slightly curbed their performance. By the end of the month, models started to shave off some of their equity positions. Their long equities remain their greatest risk.

Global Macro managers underperformed. The gains made after the election on short European bonds and long on equities only partially offset losses incurred before. Short EUR also dragged the performance. The commodity bucket proved costly. While their longs on precious metals proved rewarding, they lost on lower oil prices and copper. However, relative value trades implemented in the fixed income portfolios helped soften the pain. Managers also de-risked their portfolios ahead of the French elections, with lower exposure to European equities. This cautious stance capped their upside after the first round.

“Lower near-term political risk and persisting signs of recovery lead us to be overweight on European stocks and banks.

Stock pickers should also benefit from the improvement of the alpha backdrop as investors re-focus on the European recovery and companies’ fundamentals.

Overall, we continue to favor micro vs. macro strategies. We are cautious on CTAs and Global Macro as the trend-following potential for several asset classes seems limited for now.” Jean-Baptiste Berthon, Senior Cross-asset Strategist, Lyxor Asset Management.

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Head Office
Tours Société Générale
17 Cours Valmy
Paris La Défense
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Société Générale
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