15 Sep 2010
The Lyxor Global Hedge Fund index was up +0.05% in August, lifting year to date gains to 0.8%.
Equity markets were severely hit this month as major economic indicators faltered. Markets became fearful of a sharper than expected growth slowdown and the rising probability of a double dip in the US economy weighed on risky assets.
In such a context, beta exposures were a strong performance detractor. Long short equity managers were down by 1.5% in the long bias segment and by 1% in the variable bias one. Even though this negative performance is obviously disappointing, it still compares quite favourably with the close to 5% decline in US equity markets. This relative resilience compared with indices can be traced back to lower gross exposures (146% in August compared with 175% in April). As for net exposures, they have been somewhat increased since the start of the year (around 28% in August after 17.5% in January), but remain historically low for the strategy. Selling pressure hit stocks across the board in August, resulting in extreme correlation levels. Implied correlation on the S&P 500 jumped to nearly 0.80 by mid-month, to be compared with 0.64 at the start of the year. This was very detrimental to statistical arbitrage models, down by 1.4% this month.
In the event driven space, special sits managers suffered from their positions on the financial segment, which was hit especially hard during the overall market downturn. The strategy lost 1.3%. Merger arbitrage fared much better, up by 0.3%, as M&A activity picked up, in particular in the technology sector, were a large cash deal was favourable to the managers on the Lyxor platform. Distressed managers were also up by 0.2%. Hedging positions managed to offset losses in the basic materials and communication sectors.
The FOMC’s decision to reinvest the proceeds from their MBS portfolio into Treasuries had a sharp impact on interest rates. US 10 year rates dropped to a 2.41% low and the 10/2YR yield curve flattened by over 40 bp over the month. This was very helpful to all managers invested in sovereign fixed income and credit related segments. This was especially true for investment grade exposures, as the Fed’s decision pushed IG yields to historic lows. The move was less supportive in high yield, where spreads widened on the back of the double dip (read higher default) scare. In this context, L/S credit managers gained 0.8%, confirming that credit is this year’s best performing strategy (up by 8.5% year to date). Convertible bonds managers additionally benefited from their equity hedges and gained 1.9%.
The “long bonds” theme was also profitable for global macro and long term CTA managers. In both these strategies, the risk budget on equities is very low, so that they were not hit by the market sell-off. Performance was of 0.6% and 3.9%, respectively.
Equity markets were severely hit this month as major economic indicators faltered. Markets became fearful of a sharper than expected growth slowdown and the rising probability of a double dip in the US economy weighed on risky assets.
In such a context, beta exposures were a strong performance detractor. Long short equity managers were down by 1.5% in the long bias segment and by 1% in the variable bias one. Even though this negative performance is obviously disappointing, it still compares quite favourably with the close to 5% decline in US equity markets. This relative resilience compared with indices can be traced back to lower gross exposures (146% in August compared with 175% in April). As for net exposures, they have been somewhat increased since the start of the year (around 28% in August after 17.5% in January), but remain historically low for the strategy. Selling pressure hit stocks across the board in August, resulting in extreme correlation levels. Implied correlation on the S&P 500 jumped to nearly 0.80 by mid-month, to be compared with 0.64 at the start of the year. This was very detrimental to statistical arbitrage models, down by 1.4% this month.
In the event driven space, special sits managers suffered from their positions on the financial segment, which was hit especially hard during the overall market downturn. The strategy lost 1.3%. Merger arbitrage fared much better, up by 0.3%, as M&A activity picked up, in particular in the technology sector, were a large cash deal was favourable to the managers on the Lyxor platform. Distressed managers were also up by 0.2%. Hedging positions managed to offset losses in the basic materials and communication sectors.
The FOMC’s decision to reinvest the proceeds from their MBS portfolio into Treasuries had a sharp impact on interest rates. US 10 year rates dropped to a 2.41% low and the 10/2YR yield curve flattened by over 40 bp over the month. This was very helpful to all managers invested in sovereign fixed income and credit related segments. This was especially true for investment grade exposures, as the Fed’s decision pushed IG yields to historic lows. The move was less supportive in high yield, where spreads widened on the back of the double dip (read higher default) scare. In this context, L/S credit managers gained 0.8%, confirming that credit is this year’s best performing strategy (up by 8.5% year to date). Convertible bonds managers additionally benefited from their equity hedges and gained 1.9%.
The “long bonds” theme was also profitable for global macro and long term CTA managers. In both these strategies, the risk budget on equities is very low, so that they were not hit by the market sell-off. Performance was of 0.6% and 3.9%, respectively.
