Upgrading CTAs to Slight Overweight


As we approach the start of the Q1 earnings season in the US, financial markets experienced renewed pressures. During the period under review, the MSCI world was down 1%, with EMU and Japanese equities underperforming US equities. Commodities were also down but interestingly this had limited implications on US high yield and EM.

This was detrimental for hedge funds with the Lyxor index down 0.7% during the period under review. CTAs again outperformed, driven by the performance of the fixed income, energy and FX clusters. Long positions on the JPY vs USD were also rewarding (see chart) as a result of the continued depreciation of the USD. The minutes of the 15-16 March FOMC meeting reminded investors that the dovish stance of the Fed is not so consensual within the voting members of the Committee but this had little impact on the currency. It is actually a well known fact that Yellen had to deal with hawkish regional Fed presidents in 2016. The good news is that she has managed to control the hawks so far.

Overall, we are upgrading CTAs, from neutral to slight overweight. After the market rally in March and ahead of the US earnings season, their defensive portfolio appears to be a good hedge against any disappointment. Meanwhile, their long stance on US fixed income is less aggressive and with 10-Treasury yields near the bottom of the range of the past three years, it seems adequate. They have also reduced their shorts on energy, which is a positive development as the USD depreciation implies upside risks on the asset class.

With regards to  Event-Driven, Merger Arbitrage funds suffered due to the Pfizer/ Allergan deal break. It followed the announcement of new Treasury rules to discourage tax inversion deals. The Lyxor Merger Arbitrage index is down 1.9% this week. A number of funds were involved in the deal: Merger Arbitrage managers had set up the spread (long Allergan/ short Pfizer), while Special Situation managers held either long positions in Allergan, Pfizer or both, explaining why they outperformed. We maintain the slight overweight stance on Merger Arbitrage. The exposure of the strategy on inversion deals is marginal today, hence limiting contagion risks to the rest of the portfolios.

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