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Hedge Funds: Looking Back and Ahead

By: Philippe Ferreira, Jean-Baptiste Berthon, & Eloise Girard-Desbois

Recent patterns in financial markets, such as the flattening of sovereign curves, reflect deflationary expectations. They tend to characterize late-cycle movements ahead of a recession and a monetary easing cycle. This is inconsistent with the ongoing recovery post Covid-19, which should see a certain degree of monetary tightening in 2022. A partial explanation of the decline in bond yields lies in downward revisions to fiscal stimulus expectations in the U.S., as the current administration is constrained by its tight majority in the Congress.

Recent price action across asset classes was tricky to maneuver for alternative strategies. CTAs underperformed in June, down -1.7% according to Lyxor UCITS Peer groups, due to trend reversals in currency and fixed income markets. As bond yields fell, their positioning on U.S. Treasuries shifted to the long side and they covered USD shorts. Global Macro, L/S Equity and Event-Driven ended the month in negative territory, but in moderate proportions (-0.2%), while L/S Credit outperformed (+0.2%). Dispersion was elevated within L/S Equity and Macro, with some strategies down -5 / -10%, and dispersion was low within Event-Driven and L/S Credit strategies.

For the full quarter and in H1-2021, the script was different. Alternative strategies with a higher equity market beta outperformed as equities rallied. We estimate alternative strategies were up +1.8% in Q2, while the MSCI World was up +7.6% and the Barclays Global Aggregate was up +1%. On a year-to-date basis, equity related strategies (L/S Equity, Event-Driven) outperformed those predominantly invested in fixed income (L/S Credit, Global Macro).

Going forward, we expect healthy returns from Event-Driven and aligned the stance of Merger Arbitrage with Special Situations at O/W. The record pace of corporate activity, attractive deal spreads and diversification features of the strategy should continue to be supportive. After the rally in risk assets in H1, strategies with low beta/ low volatility features, such as Merger Arbitrage, are more attractive. We maintain the O/W stance on CTAs. The positioning remains balanced, with a long equity bias to capture the economic rebound. The slightly long exposure to fixed income is not expected to be costly if the tapering of asset purchases from the Fed causes a rise in bond yields. Finally, CTAs provide exposure to commodities which remain attractive at this stage of the business cycle.

event driven and market neutral l/s outperformed in the last 6 months

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Originally Published on July 8, 2021

The views and opinions expressed in this document are those of the authors and are not given or endorsed by the company. This document is for the exclusive use of investors acting on their own account and categorized either as «eligible counterparties» or «professional clients» within the meaning of markets in financial instruments directive 2014/65/EU. Not for U.S. investors.
See important disclaimer at the end of this document.

DISCLAIMER

This document is not intended for retail investors and is for the exclusive use of institutional investors acting on their own account and categorized as either “eligible counterparties” or “professional clients” within the meaning of the markets in financial instruments directive 2014/65/EU. his document has been prepared solely for the information of the person to whom it is presented and should not be reproduced or used for any other purpose. The circumstances in which this publication has been produced are such that it is not appropriate to characterize it as independent investment research as referred to in MiFID and that it should be treated as a marketing communication even if it may contain general recommendations. This publication is also not subject to any prohibition on dealing ahead of the dissemination of investment research. However, Lyxor is required to have policies to manage the conflicts which may arise in the production of its research, including preventing dealing ahead of investment research.

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This material has not been prepared in regard to specific investment objectives, financial situations, or the particular needs of any specific entity or person. Investors should make their own appraisal of the risks and should seek their own financial advice regarding the appropriateness of investing in any securities or financial instrument or participating in any investment strategy. Before you decide to invest in any account or fund, you should carefully read the relevant client agreements and offering documentation. No representation is made that your investment objectives will be achieved. This material is not intended for use by retail investors.

Any descriptions involving investment process, risk management, portfolio characteristics or statistical analysis are provided for illustrative purposes only, will not apply in all situations, and may be changed without notice. Past performance is not a reliable indicator of future results, and it is impossible to predict whether the value of any fund or index will rise or fall over time.

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Hedge funds may invest in futures and other derivative instruments. Futures trading and other derivatives may permit extremely high degrees of leverage and expose the funds to, among other things, volatility, market illiquidity, market risks, legal risks and operational risks. Hedge funds may be exposed to risks relating to non-domestic markets, including, without limitation, risks relating to currency exchange, tax, lack of liquidity, generating movement on the markets, political instability and transaction costs. An investment in a hedge fund is subject to a total loss.

This presentation contains the views of Lyxor AM analysts and/or strategies. The views espoused in this presentation may differ from opinions and recommendations produced by other departments or affiliates of SG and/or Lyxor AM.

Note about Indices: Indices are not available for direct investment. A comparison to an index is not meant to imply that an investment in a fund is comparable to an investment in the funds or securities represented by such index. A fund is actively managed while an index is a passive index of securities. Indices are not investable themselves, and thus do not include the deduction of fees and other expenses associated with an investment in a fund. Not all the funds that comprise indices cited herein are suitable for U.S. Investors as a result of, among other things, the implementation of the Volcker Rule.

Notice to U.S. Investors: Any potential investment in any securities or financial instruments, the categories of which are described herein, may not be suitable for all investors. Any prospective investment will require you to represent that you are an “accredited investor,” as defined in Regulation D under the Securities Act of 1933, as amended, and a “qualified purchaser,” as defined in Section 2(a)(51) of the Investment Company Act of 1940, as amended (the “40 Act”). The securities and financial instruments described herein may not be available in all jurisdictions.

Investments in or linked to hedge funds are highly speculative and may be adversely affected by the unregulated nature of hedge funds and the use of trading strategies and techniques that are typically prohibited for funds registered under the ’40 Act. Also, hedge funds are typically less transparent in terms of information and pricing and have much higher fees than registered funds. Investors in hedge funds may not be afforded the same protections as investors in funds registered under the ’40 Act including limitations on fees, controls over investment policies and reporting requirements.

Notice to Canadian Investors: Any potential investment in any securities or financial instruments, the categories of which are described herein, may not be suitable for all investors. Any prospective investment will require you to represent that you are a “permitted client,” as defined in Canadian Regulation National Instrument 31-103, and an “accredited investor,” as defined in National Instrument 45-106. The securities and financial instruments described herein may not be available in all jurisdictions of Canada.

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Notice to U.K. Investors: This communication is issued in the UK by Lyxor Asset Management UK LLP, which is authorised and regulated by the Financial Conduct Authority in the UK under Registration Number 435658.

Source: This document has been prepared by Lyxor Asset Management S.A.S., 17 cours Valmy, 92800 Puteaux. Lyxor AM is a French management company authorized by the Autorité des marchés financiers and placed under the regulations of the UCITS (2014/91/UE) and AIFM (2011/61/EU) Directives. Lyxor AM is also registered with the U.S. Commodity Futures Trading Commission as a registered commodity pool operator and a commodity trading advisor.

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Lyxor Asset Management S.A.S. (“Lyxor S.A.S.”) is a French investment management company authorized by the Autorité des Marchés Financiers and registered as a commodity trading advisor and commodity pool operator with the CFTC.

The information in this material is for illustration and discussion purposes only. It is not intended to be, nor should it be construed or used as, investment, tax or legal advice, a recommendation or opinion regarding the appropriateness or suitability of any investment or strategy, or an offer to sell, or a solicitation of an offer to buy, an interest in any security. Any decision to invest in a product should be made only after reading the offering document for that product, conducting such investigations as the prospective investor deems necessary after consulting with the prospective investor’s own independent investment, legal, accounting and tax advisors in order to make an informed determination of the suitability and consequences of an investment in such product.  Any recommendation or opinion regarding an investment in a product managed by Lyxor S.A.S. or one of its affiliates, as opposed to another product with a similar investment program, is subject to potential conflicts of interest.

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Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

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In accordance with EU regulation: The statements in this document shall not be considered as an objective or independent explanation of the matters. Please note that this document (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and (b) is not subject to any prohibition on dealing ahead of the dissemination or publication of investment research.

Disclosure: Hedge Funds

Hedge Funds are highly speculative, and investors may lose their entire investment.

Disclosure: Forex

There is a substantial risk of loss in foreign exchange trading. The settlement date of foreign exchange trades can vary due to time zone differences and bank holidays. When trading across foreign exchange markets, this may necessitate borrowing funds to settle foreign exchange trades. The interest rate on borrowed funds must be considered when computing the cost of trades across multiple markets.

Disclosure: Margin Trading

Trading on margin is only for sophisticated investors with high risk tolerance. You may lose more than your initial investment.

For additional information regarding margin loan rates, see ibkr.com/interest

Disclosure: Futures Trading

Futures are not suitable for all investors. The amount you may lose may be greater than your initial investment. Before trading futures, please read the CFTC Risk Disclosure. A copy and additional information are available at ibkr.com.

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