Remarkable hedge funds resilience in turmoil

Lyxor’s cross asset research team has found out hedge funds strategies have been resilient at the start of 2016.

Last week we saw another round of aggressive de-risking. Both markets and analysts ended 2015 with reasonable growth expectations.

These were aggressively revised down since the beginning of January – triggered by the release of disappointing Chinese PMI and the CNY depreciation.

Over the past week, we saw an acceleration of the well-known domino of themes (Slower China – Weaker Oil – Slower EM growth – Slower Global Growth – Deflation scare), with asset prices dangerously flirting with a bear market.

This unfolded without notable fundamental changes, aside from the obvious exception of oil prices failing to find either floor nor hopes of any near-term supply/demand rebalancing.

Instead, multiple uncertainties haunted investors regarding: 1) the true nature of the Chinese slowdown, 2) the remaining clout of central banks’ safety net, 3) the spillover risk from the energy & base resources credit meltdown, 4) the actual potential of EPS growth.

In that context, hedge funds displayed a remarkable resilience. CTAs and L/S Equity Market Neutral funds were the MTD outperformers. The former thrived on their short commodities and long bond exposures.

The latter successfully navigated the thematic rotations thanks to their sector overlays.

To the exception of the L/S Equity Long Bias and Special Situations funds – hit on their beta – the other strategies managed to deliver flat to modestly negative returns. The L/S Equity Variable Bias and Credit funds remained cautiously exposed.

The pricing of M&A deals and the Merger Arbitrage returns were reasonably insulated from the market turmoil.

Global Macro funds held firm thanks to their cautiously balanced exposures.

Over the coming days, we should see the exhaustion of the selling pressure, which would temporarily favor last week’s (and January’s) losers.

However, we maintain our medium term positioning on relative value, tactical and macro approaches.

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