The exhausting momentum of the year-to-date rally, ECB’s downward revisions of its economic forecasts and frictions in US-China trade negotiations sent markets in the red this week, according to the latest Weekly Brief from Lyxor’s Cross Asset Research team.
Hedge Funds were resilient, due to top-down strategies, which are defensively positioned in aggregate. They made up for the losses of Merger strategies’ severely hit by the abrupt turn in the Bristol-Myers-Celgene deal spread.
Lyxor writes: “Bristol-Myers announced the acquisition of Celgene for a record of USD89bn early January, with a 50 per cent record premium (likely aiming to avoid any bidding wars). Ahead of the April shareholders’ approval vote, the second largest shareholder announced its intent to oppose this operation, seen as too expensive given the targeted synergies. The deal spread widened 50 per cent.”
“A majority of managers were hit and reduced their exposure to the deal, as a core position in most portfolios. However, they tend to remain long the target, and in some cases have also turned long the acquirer. This suggests that they see higher odds for a deal with more reasonable terms, but they expect increased volatility until April’s vote.”
“Our positive strategic view on the Merger strategy is intact, however the environment temporarily weakened. With a dearth of new deals and large flows in the space, reduced managers’ exposures and tight deal spreads (about 2.5 per cent), the risk/reward is less compelling and points to temporary caution.”
