Lyxor: Hedge Fund Positioning After The Storm

Lyxor: Hedge Fund Positioning After The Storm

January 28, 2019

Interest Rates Outlook United States Trade conflict
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2018 ended disorderly with investors hesitating between several scenarios, which would lead to widely different performance patterns. Summarized below, none fully explain alone recent prices actions. We expect a global growth deceleration in 2019, not a recession. Window dressing and systematic trading likely amplified market moves, but we expect a chaotic recovery as investors look for evidence of stabilizing economic releases, greater clarity on Brexit and trade wars, and assurances from the Fed. Uncertainty and volatility would remain elevated early this year. Later, a more sustainable US-China truce and the verdict on Brexit would open more buying opportunities and lead to more fundamental pricing.

2018 ended disorderly with investors hesitating between several scenarios, which would lead to widely different performance patterns. Summarized below, none fully explain alone recent prices actions. We expect a global growth deceleration in 2019, not a recession. Window dressing and systematic trading likely amplified market moves, but we expect a chaotic recovery as investors look for evidence of stabilizing economic releases, greater clarity on Brexit and trade wars, and assurances from the Fed. Uncertainty and volatility would remain elevated early this year. Later, a more sustainable US-China truce and the verdict on Brexit would open more buying opportunities and lead to more fundamental pricing.

Overall, alternative strategies appear attractive but dispersion across strategies might be high. As we start 2019, we are positioned around three axes: reduce exposure to high beta strategies, reduce sensitivity to Momentum, and leverage on the U.S. M&A cycle.

The dominance of speculative drivers early this year would keep on unsettling long fundamental strategies, either forced to stay on the sidelines or to take reckless risks. We downgraded L/S Equity strategies that show high market exposure and sensitivity to Momentum. We also downgraded Special Situation strategies to Neutral, skeptical that fundamental rationales will be rewarded in the short-term.

We would stay Neutral on L/S Equity neutral strategies, attractive for diversification, but still at risk from their momentum bias, while factors arbitrage could be unsettled by transversal political drivers. We are also Neutral CTAs which have now turned defensive, but which are vulnerable to streams of market reversals. We are neutral Global Macro. Most macro managers are defensive but would remain constrained by speculative drivers.

We maintain our OW on Merger Arbitrage, which should perform, reasonably decorrelated from market trends. We also remain OW on Fixed Income Arbitrage, which has been a good diversifier when equity volatility rises.

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