Spring Rally for Merger Arbitrage
Hedge Fund Briefs – May 2017
All eyes were focused on Europe in April, ahead of the presidential election in France. Election polls were eventually reliable, and the victory of Emmanuel Macron over Marine Le Pen was a relief for European risk assets, both equities and high yield credit. In parallel, the Euro appreciated vs. USD as Frexit fears receded and economic growth in the U.S. slowed down.
These market conditions led to contrasting performances across hedge fund strategies. The Lyxor Hedge Fund index was slightly down in April (-0.2%), as a result of negative returns experienced by Global Macro and CTA strategies. Both strategies were hampered by short positions on European currencies vs. USD. In parallel, momentum strategies were penalized by the announcement of general elections in the UK, which caused trend reversals across UK assets.
On a positive note, Event Driven, Fixed Income Arbitrage and L/S Equity indices were all positive in April. In particular, the Lyxor Event Driven index outperformed, up 2% in April and 4.2% year to date (as of early May). Overall, higher positions on cyclical sectors such as financials and materials were rewarding. Within Event Driven, Merger Arbitrage funds took the lead in April, buoyed by positions in Actelion, NXP semiconductors, Syngenta and Alere.
Going forward we prefer L/S Equity and Event Driven strategies to CTA and Global Macro. Stockpickers should benefit from the lower correlation between stock (and sector) returns in the U.S and in Europe. Meanwhile, trend following conditions remain constrained by the lack of firm trends in several asset classes. Finally, within Global Macro, we have a preference for multi asset/diversified managers compared to fixed income or foreign exchange specialists. Expectations of higher bond yields and dollar appreciation are less straightforward as the market reevaluates the optimism that followed the U.S. election.