Weekly Brief by Lyxor Cross Asset Research


Heterogeneous Participation in the Risk Rally

Last week, markets focused on welcoming encouraging October economic releases,
factoring possible non-US central banks actions, digesting a more hawkish Fed and
jumping into the rally.

There was a lot of economic data and EPS releases to digest which, on balance, conveyed
a reassuring take on the mild global recovery. These, along with the pricing of further
easing in Europe and China (and possibly in Japan), the re-risking of smart money and
better technicals, altogether fueled a risk rally. It filled most of the gap dug since August.

Signs that the pulse of the rally might be exhausting are emerging. Indeed, valuations are
back to pre-sell-off level, short covering is leaving equities with lesser protection and most
of the smart money’s re-risking has been achieved.

While hedge funds proved resilient during the sell-off episode, they gave back some of their
advance to traditional assets during the rally. Their overall performance last week reflected
heterogeneous strategy returns.

Primary victims of the sell-off, the wheel turned in favor of Event Driven and the longest
bias L/S Equity. Both strategies continued to regain the lost ground, especially in their
sectors of predilection: Technology, Communication and Consumers.

In contrast, CTAs underperformed, hit by their long bonds exposure. US short term rates
bore the brunt of the FOMC hawkish tone. Global Macro were flat, their losses in rates
were offset by gains in their long USD crosses. Emerging and Asian funds lagged, also
under the pressure of the Fed and the dollar.

As the trading pulse in risky assets gradually erodes and with remaining uncertainties as
regards the Fed’s path, hedge funds are offering a balanced market exposure.

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