Shockwaves From China Spare Hedge Funds
The Weekly Brief by Lyxor Cross Asset Research
Risk assets continued to be bruised and shaken during the second week of January. On top of the Fed tightening bias, the fear that China has engaged in a currency war and the likely deepening of the US earnings recession in Q4-15, have contributed to the sharp falling stock prices. During the first two weeks of January, benchmark equity indices fell between the range of 5% to 10%, high yield spreads widened by 40 and 50 bps respectively in the US and Europe, and commodities fell by 10% (S&P GSCI index). Meanwhile, safea ssets such as the US dollar and sovereign bonds in developed countries are up.
Hedge funds, which have adopted a defensive stance over the course of the second half of2015, have been able to navigate the turmoil without major damage. The Lyxor Hedge Fund index is down by 0.8% YTD, which is quite remarkable. CTAs have largely outperformed, being up by 3.6% YTD. They have been supported by their long fixed income, long USD and short commodities positioning. Meanwhile, CTAs have massively shaved off their equity holdings during the first week of January. The equity deleveraging by CTAs early January is comparable to the cut implemented between August 18th and 25th 2015 (see chart).
With regards to other hedge fund strategies, they are down YTD by a range that spans from -0.5% (Lyxor Global Macro index) to -2.2% (Lyxor Event Driven Broad Index). The worst performing sub-strategy is Special Situations, down by -3.8% YTD. This is a strategy that we downgraded to underweight December. In terms of funds’ performance, we note that: i) all CTAs but one in our sample are in positive territory, ii) all Event-Driven funds are in negative territory, iii) several Global Macro funds are positive, iv) in the L/S Equity space, market neutral managers are broadly positive.
Going forward, CTAs appear as the best hedge against additional nasty market developments. We believe that market concerns are somewhat exaggerated but the momentum and sentiment is so negative amongst the market participants that it seems too early to lean against the wind. We stick to our recommended allocation, which involves a preference for hedge funds with a relative value approach and limited market directionality.
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