Hedge funds continued to decline in December, largely driven by L/S Equity (and to some extent CTAs), according to the latest Weekly Brief from Lyxor’s Cross Asset Research team.

L/S Equity strategies continued to suffer from the unusual level of uncertainty overshadowing stock fundamentals and unsettling quant factors.
 
Lyxor writes: “Overcrowded positioning was another challenge for stock pickers, all looking for the same scarce cheap stocks with stable growth. The rotation out of Momentum and Growth stocks, with a limited cushion from Quality and Defensive ones, impacted managers despite their cautious leverage and net exposures.”
 
“The rise in bond yields since the end of August and the upswing in risk aversion since October has led many Global Macro/Multi Asset strategies to significantly reduce their short duration positions on Treasuries.”
 
“Yet, CFTC data reported that in the first week of December, non-commercial investors would have halted their intense short covering. Over the same period, these investors rapidly extended long positions on Gold futures & options. Speculative positioning on gold has now moved away from the short stance that it had dived into over the summer.”
 
“Market sentiment may have run a full circle, starting from an end-of-deflation and normalisation optimism in Q3, to fresh recession scares and rekindled demands for monetary accommodation in Q4.
 
“Data on EUR positioning points to a wide divergence between real money and leveraged funds. Asset managers/ institutional investors have turned structurally bullish on the EUR since 2016. Hedge funds (identified as leverage funds in the CFTC’s TFF data) have switched stance a few times, and turned bearish this past May.”
 
“Yet, both types of investors seem to have agreed recently. Over the past few weeks, both investor segments have reduced their derivative exposures to the old continent currency. The repositioning is not stretched, but it is a further erosion of any hopes of a return to purchasing-power- parity valuations.”