Lyxor Weekly Brief: Summer Air-Pocket


Lyxor Weekly Brief: Summer Air-Pocket

Intensifying stress over North Korea boosted most safe havens while dragging risk assets. VIX rocketed up, DM govies yields retraced, credit spreads widened, gold progressed. This move quickly reversed upon signs of de-escalation. Meanwhile the growing political isolation of Mr. Trump further dented in the - modest - remaining hopes of reflationary policies in the US. Amid reduced summer trading volumes and a lack of compelling market catalysts, investors further de-risked their portfolios.

The Lyxor Hedge Fund index was down this week. Global Macro funds underperformed, though returns were dispersed. Exposures to rates and equities usually cost, while they recorded gains in FX. CTAs fared better with gains in short commodities offsetting their long equity allocation.

Event Driven funds proved resilient. Special Situations funds benefitted from their tilt to non-cyclical sectors. Their activist positions also proved resilient: the presence of a fundamental catalyst helped weather the short-term volatility. Merger Arbitrage continued to benefit from several bidding wars. They remain under-invested and tend to favor complex operations while remaining shy of the mainstream low-yielding deals.

Beta was the main L/S Equity funds’ driver. The summer air-pocket overshadowed a strong US earnings season. Robust top-line growth and an elevated share of beats were not rewarded in markets. A majority of stock headed mildly down after their EPS announcement. Dominated by sector moves, stock differentiation was tame. The contribution from alpha was poor for US funds. Similar conditions also prevailed for Japanese managers. By contrast, the European season was weaker. Growth numbers were decent but did not surprise strongly, with a higher Euro and a cyclical peak driving revisions down. However, returns were more in-line with EPS announcements with notable single stock discrimination. Following a strong H1 and a recovery from the June factor rotation, managers tend to reduce their exposure and lock in profits.

 

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