CTAs outperform on the back of their long equity stance
Hedge Fund Briefs: March 2017
Risk assets have experienced a strong start to the year thanks to the rebound in economic activity in developed markets. The MSCI world was up in excess of 5.5% YTD as of early March, led in particular by the U.S. market. Meanwhile, the US dollar index has regained its upward trend in February, after a pullback in January, on the back of expectations the Fed is on track to hike rates in the short term.
The market environment proved supportive for hedge funds in February. The Lyxor hedge fund index was up 1% last month, led by CTAs and Event Driven managers. On a negative note, some fixed income managers suffered negative returns lately.
The Lyxor CTA Broad Index was up 3.2% in February, fuelled by the long stance on equities and commodities. Trend followers have maintained stable their net long exposure to equities in every region, though they somewhat reduced their positions on the U.S. market and continued to add to European equities.
Their long stance on the U.S. dollar vs. the Euro and the GBP also added to gains.
On a year to date basis, Event Driven managers continue to outperform. Their higher exposure to cyclical sectors such as financials, technology and industrials was supportive. Meanwhile, their exposure to non cyclical stocks was revised down but remains sizeable. The outperformance of Event Driven managers is taking place amid solid M&A activity so far this year, in particular in the U.S. One of the largest deal announced over the recent weeks is the USD 30bn acquisition of Actelion by Johnson & Johnson in the health care sector. The deal ranks high in merger arbitrage portfolios and contributed to recent gains.
Going forward we maintain our overweight stance on Event Driven strategies and CTAs. Meanwhile, we stay cautious on directional credit funds which may experience difficult times as bond yields continue to move higher and credit spreads remain very tight. On the L/S Equity side, we prefer U.S. managers which may benefit from higher dispersion in stock prices in a context where corporate tax reform should be implemented in the coming quarters by the new U.S. administration.