Over the recent weeks, hedge funds have remained broadly defensive in anticipation of key announcements in June that may disrupt market conditions. As such, explains Lyxor AM, they are definitely not adding risk to their portfolios.
The Brexit referendum is the most prominent event among the near term potential disruptors. In response, several European L/S Equity managers have decided to significantly downsize their exposure to UK assets ahead of the vote. Meanwhile, CTAs and Macro managers maintain large net short positions on the GBP/USD. At the end of May, point out the firm, CTAs added to their GBP/USD shorts while Macro managers slightly reduced their short positions on the currency pair.
According to the Lyxor AM team, head by Jeanne Asseraf-Bitton, Global Head of Cross Asset Research, the mid-June FOMC meeting and the associated summary of economic projections will also be closely monitored by managers amid signals that US economic activity accelerated in Q2. As a result of such near term uncertainties, the median equity beta of hedge funds on the Lyxor platform remained below 20% during the last week of May (see chart) and edged even lower for strategies such as CTAs, Global Macro and multistrategy.
With regards to recent performance, say Lyxor AM experts, the last week of May was supportive for every strategy, with Macro and L/S Equity funds outperforming. Macro managers benefitted from their equity exposures and from the USD rally. In the L/S Equity space, variable biased managers outperformed. It is interesting to note that L/S managers with a defensive bias made the most of the market environment in May as the value rally faded. However, CTAs continued their recent underperformance. In May the Lyxor CTA Broad index was down 2.3%.
“Going forward, we maintain the preference for strategies that limit exposure to market directionality (i.e. we prefer merger arbitrage to special situations as well as market neutral and variable biased L/S to long biased managers). We also remain overweight CTAs in the midterm though tactically we advise a neutral stance as the large build up of short GBP/USD positions would cause losses if the UK opts for remaining in the EU. Finally we are neutral on L/S Credit and overweight Fixed Income Arbitrage”, conclude the Lyxor AM team.