Lyxor: Rising Yields, Global Equity Market Rally Power Hedge Fund Gains

Sep 18 2017 | 10:06pm ET

Hedge funds rose last week as risk-on sentiment remained in place, according to new research from Lyxor Asset Management, with all substrategies tracked by the firm ending the period in the green. 

Lyxor’s Hedge Fund Index gained +0.5% in the week through September 12, bringing its year to date tally up to +0.8%. The hedge fund landscape has been broadly supported by rising sovereign bond yields in developed markets, in particular in the U.K, while equity markets in both developed and emerging markets extended their winning streaks. 

For the period, Lyxor’s Fixed Income Broad index outperformed, gaining +0.8% to bring YTD gains to +4%, while Global Macro managers booked gains of +0.6%. The company’s CTA Broad Index gained +0.5% to bring year-to-date losses to -1.0%, while Event-Driven and Long/Short Equity indices gained +0.4% apiece. For the year so far, Event-Driven strategies lead the pack, up +6.9%. 

“Going forward, we anticipate bond yields to edge higher, amid buoyant macro data releases and expectations that the Federal Reserve will start shrinking its balance sheet in the coming weeks,” said Philippe Ferreira, Lyxor’s senior strategist, in the research note. “We expect the U.S. administration to move forward with tax reforms, which would [also] contribute to lift Treasury yields. 

“Implications for hedge funds strategies loom large,” he added. “Fixed income arbitrage is attractive in our view (overweight) but we are cautious on directional L/S Credit funds (underweight). CTAs (neutral) would be vulnerable if trend reversals in FX and fixed income do occur, but the strategy is now a good diversifier if our scenario on bond yields does not materialize. We maintain Event Driven at overweight, a strategy that we prefer to L/S Equity (Neutral). 

“In particular, we are defensive on L/S Equity market neutral funds (underweight) on the back of expectations of sector rotations triggered by rises in bond yields. Finally, within the Global Macro space, we maintain a preference for multi asset and EM funds compared to discretionary fixed income/ FX specialists. Both asset classes remain challenging to navigate as central banks remove accommodation.”

Lyxor’s Weekly Brief aims to identify trends in hedge fund investing while leveraging the proprietary information accessible through the company’s managed account platform.

Lyxor’s Hedge Fund indices are based on the universe of funds available on the platform determined on a monthly basis to be eligible for inclusion. Participating funds represent $12 billion of assets under management and replicating $220 billion in AUM as of August 31, 2017.

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