Lyxor Asset Management

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Spain’s Banking Troubles Leave L/S Credit Unscathed

The Conservatives failed to get a majority in last week’s snap election in the UK which may translate into a hung Parliament. The implications over the UK relationship with the EU are unclear, however, FX markets discount that there will be serious challenges. The GBP fell -1.5% vs. USD as soon as exit polls were released. Meanwhile, the options market signals market participants are skewed toward further weakness in the Cable. Coupled with the EUR depreciation vs. USD following the ECB meeting last week, such developments are likely to be supportive for Macro funds as a result of their short positioning on European currencies versus USD.

During the first week of June, hedge fund performance was slightly negative. CTAs outperformed for the second week in a row, as a result of the outperformance of U.S. stocks compared to European indices. Their long positions on Fixed Income also contributed to positive returns. On a negative note, Macro managers underperformed during the period under review, which precedes the ECB meeting and the UK vote. The reasons for Macro underperformance are quite similar to those that explain the positive returns of CTAs but their opposite positioning has translated into negative returns.

Fixed Income and Credit funds’ performance was muted last week. Across the funds that we monitor, there were limited exposures to Banco Popular’s subordinated bonds, whose holders were wiped out following the decision of the ECB to declare the institution “failing or likely to fail”. Some funds even managed to post gains being long Banco Popular’s senior debt and short AT1 bonds. Overall, Fixed Income strategies are delivering a solid start to the year compared to their benchmarks. Their short duration positioning and long stance on credit paid off in Q4-16 as bond yields rose and credit spreads tightened. Over the last three months, the fall in sovereign yields has nonetheless dented the lead of active funds compared to their benchmarks. However, the continued fall in credit spreads has been supportive, especially for European managers. Based on Morningstar data, we estimate that almost 80% of the flexible bond managers in Europe outperformed their benchmark since the beginning of the year, which is very significant.

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