Last updated: 09:41 / Tuesday, 3 November 2015
October Data

Lyxor AM: Upgrading European L/S Credit to Overweight

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Lyxor AM: Upgrading European L/S Credit to Overweight
  • October saw hedge funds delivering returns close to 2% on the back of a renewed sense of market optimism
  • Event-Driven and Global Macro strategies outperformed, up 2.5 and 3% respectively
  • CTAs, which were up 2.7% last week, underperformed for the full month of October as they failed to capture the market rebound

October saw hedge funds delivering returns close to 2% on the back of a renewed sense of market optimism. Event-Driven and Global Macro strategies outperformed, up 2.5 and 3% respectively. CTAs, which were up 2.7% last week, underperformed for the full month of October as they failed to capture the market rebound.

The widening gap between the monetary stance in the US (hawkish bias) and in Europe (dovish) has fuelled the USD and dragged down commodity prices. This is supportive for CTAs and Macro managers on which we remain overweight. According to Lyxor proprietary data, both strategies are long USD vs major currencies and short commodities. There are nonetheless nuances: CTAs are relatively more aggressive on energy (net short) than Macro. In the wake of the ECB’s dovish words, long duration positions of CTAs are benefitting from the fall in bond yields in Europe.

Event Driven managers were up 2.4% in October, partially recouping some of the losses experienced during the summer. The S&P Health Care index was up 8.4% this month, supporting elevated exposures to the sector in their portfolios. Meanwhile, the announcement last week that Pfizer is considering a merger with Allergan has fuelled the stock price of the latter company by 20% in a week. Some managers have a long exposure to this stock in the range of 5-10% of net assets. This will support the performance of the strategy in the short term and will help to offset any negative developments from Valeant which has suffered allegations of fraud.

Finally, Lyxor is upgrading the European L/S Credit strategy to slight overweight. "We believe it is likely that European credit will be supported by both fundamentals and technicals. European corporate default rates are low and are projected to remain this way in H1-16 by Moody’s. On top of that, European companies are deleveraging which is supportive for credit risk. On the technical front, issuance is low and the ECB is likely to expand its asset purchase programme to include corporate debt, thus creating new sources of demand. In this environment, European L/S Credit funds are expected to benefit from supportive beta conditions on top of their ability to generate alpha (see chart below). An extension of the QE programme by the ECB involving corporate bonds is likely to support the high yield segment as a result of the portfolio rebalancing effect. It is also likely to fuel peripheral issuers and cyclical sectors in relative terms".

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