Global financial markets showed a pleasant picture in May as risk aversion receded. Equity indices displayed positive returns worldwide, with the US, European and Japanese indices outperforming Emerging markets. The latter were hit by the hawkish Fed minutes, which revived fears of a US rate hike over the summer. As a result, the US dollar strengthened, advancing against both DM and EM currencies.
On the alternative side, the Lyxor Hedge Fund Index was up 0.8% through the month, with Event Driven outperforming. Strategies with more directionality contributed to the bulk of the gains while CTAs continued to suffer from shifting market trends.
Event Driven kept up the positive momentum with Special Situations (+2.5%) outperforming Merger Arbitrage (+1.4%). The month of May recorded an acceleration of M&A activity. This dynamic is supportive for merger arbitrage as it provides a broader set of investable opportunities. Managers also benefited from a number of successful deal completions (including Time Warner Cable vs Charter Communication), while spread tightening on various transactions added to the gains (Baxalta vs Shire, SAB Miller vs AB Inbev).
Special Situations funds, which are more sensitive to market directionality than their peers, extended gains in May with the improvement of risk appetite. They thrived on their core positioning on Akorn, Athabasca Oil and Dow Chemical stocks.
“The performance of Event-Driven strategies picked up in May after having experienced difficult quarters. The strategy recently benefited from the completion of large deals and the tightening of deal spreads. Managers have also adopted a dynamic approach to manage risks, moving away from longer dated soft situations and skewing their portfolio towards hard catalyst M&A situations”, point out Philippe Ferreira, Senior cross-asset strategist at Lyxor Asset Management.
L/S Equity funds outperformed the MSCI World index, with long bias managers leading the pack. L/S Equity managers stuck to their guns, maintaining a cautious stance, with a dwindling exposure to cyclicals. In May, long positions on the financial and technology sectors were rewarding, though the picture was different across regions. All European managers posted strong returns on the back of the quality bias on their long books. Yet, ahead of a number of uncertain macro events and the looming UK Referendum vote, managers held a tilt towards defensive sectors and kept a low net exposure. This explains that their participation to the market rally during the second half of the month was somewhat limited. On the other side of the Atlantic, outcomes were significantly disparate. US managers took advantage from the rebound in the healthcare sector but suffered from their long exposure to the industrials and materials.
Fixed income and Credit arbitrage performances were muted as the positive support from the ECB and oil price appreciation started to fade away in credit markets. Managers recorded contrasting results, underlining the fact that alpha generation made the difference. Asian managers outperformed on the back of their positions on the energy and basic materials sectors while the performance of European funds was milder than that of their peers.
Global macro managers recouped the bulk of losses incurred last month, up 1.2%, thanks to the strengthening of the US dollar and their fixed income portfolio. Yet, this picture hides disparate returns across managers due to different positioning. Overall, long exposures to the USD against the G-10 currencies were the most rewarding. Managers sharply increased their short allocation to the EUR. The picture was similar for the fixed income bucket as returns were fuelled by both short exposures to US and UK durations and longs on European bonds. Relative value trades were also beneficial.
The appreciation of the US dollar and the rebound in energy prices were detrimental to CTAs. Long term models (-3.1%) weighted on the overall performance, while short term ones (-0.5%) proved more resilient. The strengthening of the USD was harmful to their short stances, especially against AUD, JPY and EM currencies. Alpha generation on shorts in EUR, CHF and GBP helped mitigating losses.