The Weekly Brief by Lyxor Cross Asset Research


Race to the Bottom Fuels CTAs and Global Macro

Central Banks have re-engaged into a race to the bottom over the recent weeks, which has generated support to hedge fund strategies with sizeable FX and fixed income positions.

Two weeks ago, the surprise move by the BoJ to introduce "Quantitative and Qualitative Monetary Easing with a Negative Interest Rate" led to a depreciation of the JPY vs USD and a rebound of Japanese equities (though short lived). In its statement, the BoJ said that “it will cut the interest rate further into negative territory if judged as necessary”. Meanwhile, Janet Yellen will speak on several occasions over the next few days. Although, she is not expected to provide a detailed guidance about the next FOMC decision to be adopted mid- March, markets hope the tone will be dovish. Finally, the European Central Bank is set to adopt additional easing steps at its next monetary policy meeting on March 10.

Since the beginning of the year, the main beneficiaries of such renewed central bank activism have been CTAs and Global Macro. According to Lyxor indices, these strategies are the only ones posting positive returns year to date (3.3% and 0.2% respectively). At the other end of the spectrum, hedge fund strategies with more market directionality such as L/S Equity and Event Driven underperformed (-2.1% and -2.3% respectively). Our recommendations remain the same: a preference in strategies with a relative value approach (overweight Global Macro and Fixed Income Arbitrage, along with L/S Equity Market Neutral and L/S Equity Variable Bias). On the contrary, we continue to recommend avoiding L/S Equity Long Bias, L/S Credit and Special Situations in Event Driven.

Going forward, markets remain concerned about recession risks in the US and the declining marginal impact of central bank actions. Translated into hedge fund allocation, a very defensive investor would favor a 100% allocation to CTAs. Managed Futures will be the only hedge fund strategy delivering positive returns if US equities enter bear market. We do not fall into the group of pessimists. We note that US consumption continued to grow at a robust pace in Q4 last year and real wages continued to move higher into 2016. This should ultimately support activity and lead to a rebound in risk assets at a later stage.

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