Lyxor: Hedge Funds Should Outperform Traditional Assets In Tightening Environment

Dec 21 2015 | 6:11pm ET

Hedge funds were relatively resilient in an otherwise risk-off environment last week leading up to the Fed’s long-awaited first interest rate hike, according to Lyxor Asset Management’s most recent Weekly Brief. 

The Lyxor Hedge Fund Index dipped 0.5% in the period between December 8 and December 15, 2015, giving up nearly all of the gains in the prior week. 

Event Driven managers outperformed, gaining 0.2% and the sole positive member of Lyxor’s substrategies. Within the group, both Merger Arbitrage and Special Situations funds ending flat or slightly positive.

Long/Short equity funds, meanwhile, also navigated the turmoil relatively well, as strategies with limited directionality generated better results than long biased funds. Lyxor’s L/S Equity Broad Index dipped 0.3%. 

Lyxor’s research noted that Macro managers slipped more steeply during the period, due mostly to long positions on the USD. The company’s Global Macro Index dropped 1.4%.

CTAs, on the other hand, maintained a sizeable exposure to the energy sector, which helped keep the segment from slipping further. The CTA Broad Index fell 0.7% during the week.  

As the full year comes to a close, Lyxor’s L/S Equity Index is up the most, at +3.4%, followed by a +2.4% gain in its Global Macro Index. The firm’s Event Driven Index remains down -4.2%, followed by a -3.3% decline in the company’s Fixed Income Broad Index. 

Lyxor noted that while global equities initially responded positively to the Fed announcement, the moves have proven short-lived. The U.S. dollar has resumed an upward trajectory while the U.S. high yield credit market faces an uncertain path on the back of the Fed’s tightening and the collapse in oil prices. Both the higher dollar and energy trends will benefit CTAs, Lyxor said. 

“While the new monetary stance is backed by strong U.S. economic data, investors will need to keep in mind that liquidity tightening is a headwind for risk assets,” noted Philippe Ferreira, Lyxor senior strategist. “Over the last six months, the investment horizon has shortened considerably, and this is likely to continue. In a nutshell: be tactical. Long term investors are likely to struggle in such an environment, and the value proposal of hedge funds makes greater sense in this context.

Looking a bit further out, Lyxor also commented that with little market beta to capture from now on across asset classes, alpha generation will be key. Selecting the right strategy and the best manager within each strategy is likely to ensure attractive risk adjusted returns amidst volatile conditions.

“Following the Fed lift-off, we favor Global Macro, and to a lesser extent CTAs, for their diversification properties,” continued Ferreira. “Both tend to outperform when the volatility regime is higher. In the L/S Equity space, we suggest managers who have limited directionality, and err on the side of caution with Event-Driven managers who are active in the distressed and high yield space.”

The Lyxor Hedge Fund indices are based on the universe of funds available on the Lyxor Managed Account Platform determined on a monthly basis to be eligible for inclusion. Approximately 70 funds participate on the platform, representing $8.4 billion of assets under management and replicating $250 billion in AUM.

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