The Lyxor Hedge Fund Index was up +1.7% in February. 10 out of 12 Lyxor Indices ended the month in positive territory, led by the Lyxor Special Situation Index (+5.3%), the Lyxor CTA Short Term Index (+3.5%), the Lyxor Convertible Bond Arbitrage Index (+3.1%).
The gradual stabilization in oil prices, sparks of economic improvements in Eurozone and multiple evidences of central banks efforts all contributed to ease deflation fears. It triggered a broad and rapid rotation in most of the assets and sectors tied to the themes which dominated over the last few months. Recovering risk appetite supported strategies most exposed to risky assets, in particular the Event Driven and the L/S Equity Long Bias funds. Short term CTAs’ models also strongly benefitted from the market trends rapidly emerging. Conversely, L/S Equity Market Neutral and longer term macro funds endured temporary turbulences.
The Lyxor L/S Equity Variable and Long Bias funds were up +0.5 and +2.6% respectively. US funds outperformed and generated the greatest alpha, in particular through their exposure to the energy, financial and healthcare sectors. European focused funds remained cautious. Following a number of false dawns and real scares, they only gradually participated in the rally in Eurozone. Over the month they materially raised their allocation to industrials and mid caps, while taking profits on the consumer sectors and to some extent on financials. These changes were consistent with greater confidence toward the economic dynamic in the region, while taking profits on the oil and QE trades. EM focused funds produced returns in line with their underlying market, flat over the month. By month-end their aggregate exposures displayed a dominant allocation on Asian cyclical sectors.
The Lyxor L/S Equity Market Neutral index was down as much as - 0.9%. The reversal in themes which dominated these last months (the oil scare, the deflation fear and EU de-risking) resulted in a substantial and rapid sector rotation out of the defensive sectors into cyclical stocks. The ones without sector neutrality underperformed the most.
The recovery in Event Driven funds accelerated in February. The drivers that played so severely against the strategy in the second half of last year were powerful contributors to their recovery in February. Merger arbitrage funds were the first ones to rally, primary beneficiaries of resuming investors’ risk appetite. A meaningful deal spread tightening and completion of some operations contributed to the strong returns. An honorable load of new announcements allowed funds to refresh their portfolios.
The Lyxor L/S Credit Arbitrage index was up +1.4%. Most funds were supported by a recovery in global credit markets. Substantial inflows poured back into the space. Easing concerns on deflation and a stabilization in oil prices gave some air to both IG and HY markets – especially in the non-energy segments. Funds focusing on European markets outperformed. They benefitted from the ECB’s QE prospects being priced in periphery spreads. They also extracted alpha out of the Greek situation, though with volatility. The intensifying Fed debate ahead of the March FOMC weighted on EM credit in the early part of the month.
The drivers for the strong performance of the Convertible Arbitrage Strategy were similar. The easing pressure on liquidity, tightening spread and rallying equity markets provided strong tailwinds. The stabilization in oil prices had a strong impact on HY convertibles. Primary markets rebounded after several months of poor activity, positively contributing to the strategy’s return. Funds focusing on Europe also benefitted from the ECB reflation being priced in.
The Lyxor CTA Long Term Index was down -0.2% over the month. The thematic reversal in oil, inflation and growth stances resulted in substantial losses in their fixed income and commodity exposures. These were only partially offset by their long equity positions. A pause in the USD strength also detracted performance. The last week of February saw renewed weakness in oil and yields. This allowed LT models to recoup most of the lost ground.
In contrast, ST models quickly captured the trend reversals unfolding over the month and outperformed not only their long term peers, but all other hedge fund strategies.
Global Macro funds tend to be adversely impacted by turning macro themes. However, they were only marginally unsettled by that of February. A majority of them were adequately positioned for an inflection in yields. Their long equity positions balanced losses recorded in commodities (both in energy and precious metals).
“It’s now time to be selectively directional, in reflation zones especially. Global FX and rates , likely to be the most active playing fields, would also offer appealing trading opportunities.”, says Jean-Marc Stenger, Chief Investment Officer for Alternative Investments at Lyxor AM.