During a period in which most asset classes sold off ferociously and fixed income provided no downside protection, the Lyxor Hedge Fund Index was down only 0.8 per cent. This highlights the resilience of this asset class to wide market movements. 

Philippe Ferreira

Head of Research - Managed Account Platform

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During a period in which most asset classes sold off ferociously and fixed income provided no downside protection, the Lyxor Hedge Fund Index was down only 0.8 per cent. This highlights the resilience of this asset class to wide market movements. 

Going forward, the risk of policy error is increasing as the Fed begins to implement its exit strategy. As a result, wide market movements may occur more frequently than investors may think and alternative investments will appear to be increasingly attractive amongst the limited options available to protect portfolios.

During the weekly period under review, which includes the markets severe reaction to the disappointing ECB meeting, L/S Equity, Fixed Income Arbitrage and Merger Arbitrage were relatively resilient (-0.4 per cent, -0.3 per cent and -0.2 per cent respectively). Meanwhile, as discussed in our report last week, which was based on back-of-the envelope estimates, CTA and Global Macro strategies underperformed against other hedge fund strategies. They were down 1.5 per cent and 1.2 per cent respectively.

Within L/S Equity, the funds with limited market directionality outperformed. The Lyxor L/S Equity Variable Bias Index even managed to deliver a slightly positive return. Within CTAs, short term models outperformed long term systems. In Event-Driven, Merger Arbitrage outperformed Special Situations funds.

Overall, these developments are in line with our expectations. We have recently downgraded Special Situation funds (underweight) and CTAs (neutral). In parallel, we have upgraded Fixed Income arbitrage (overweight). With regards to L/S Equity, we have expressed for some time our preference for funds with limited market directionality (overweight variable bias and market neutral). Finally, we remain overweight Global Macro though the strong heterogeneity in that space implies that a bottom up approach (fund selection) is more important than a top down view.

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