Lyxor Weekly Brief: L/S Equity managers in wait and see since December


Lyxor Weekly Brief: L/S Equity managers in wait and see since December

This week's Lyxor Weekly Brief: L/S Equity managers in wait and see since December. This is a weekly report from Lyxor’s Cross Asset Research team, focused on hedge fund flows, performance and positioning. It aims at identifying trends in hedge fund investing every week, while leveraging on the proprietary information accessible through the Managed Account Platform.

L/S Equity managers in wait and see since December

World equities staged a second phase of rebound since the capitulation in December lows, driven by signs of progress on the US-China trade war front, and by Fed adding dovish nuances to its recent statements. The positive U.S. job reports also helped overcome the ISM disappoint.

The L/S Equity strategy outperformed this week, mostly from their beta. Funds’ returns were homogeneously red in December, and green in January. Yet, a number of funds, trading oriented, stood out in December, giving back some gains in January. We observe only few alterations in L/S Equity portfolios at the start of 2019. Most managers steadily reduced their net and gross exposures since the summer 2018, both brought near to their historical lows. Their de-risking came to an end in December. Since then, very few funds bought stocks back over the last two weeks. Similarly, sector allocations were not substantially turned since December lows.

L/S Equity managers stand in wait and see ahead of several key pending catalysts. The Brexit vote in Parliament is likely to take place on January 15. Odds look grim, the plan B could lead to try and delay the March 29 deadline. The earning season will also kick off next week with some of the banking majors. While reports for Q4 might still look decent, investors will scrutinize companies’ guidance. U.S. and Chinese early trade talks ended on January 9 on a positive tone. Chinese concessions remain far from U.S. initial requests, but plunging financial markets are probably pushing Mr. Trump to advance its timing ahead of the 2020 elections. More senior-level talks will probably be held by end of January. Moreover, the high stock re-correlation, typical in sell-off episodes, is only starting to normalize. In the meantime, the market structure remains adverse for stock pickers.

European funds appear the least inclined to return to markets given the multiple local political and economic uncertainties. Domestic stocks were reduced in line with a firming Euro. U.S. funds’ exposures are higher than in Europe. They added safe-haven positions, while shaving off tech and financials holdings. Interestingly, some Asian managers are cautiously rebuilding exposures. Industrial are preferred over tech stocks, consistent with improving trade talks, further China policy easing, but an intensifying tech war. Quantitative funds’ portfolios are now skewed toward defensive positions, reflecting the reshuffling in Momentum stocks.

 

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