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Weekly Brief: Hedge funds outperform bonds and equities

Equity and bond markets experienced renewed tensions during the period under review. European markets saw higher selling pressure than US markets, which was a negative for Global Macro managers as they have sizeable long European equities positions in their portfolios.


Philippe Ferreira

Head of Research – Managed Account Platform

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Equity and bond markets experienced renewed tensions during the period under review. European markets saw higher selling pressure than US markets, which was a negative for Global Macro managers as they have sizeable long European equities positions in their portfolios.

In this risk-adverse environment, hedge funds posted negative returns but outperformed traditional asset classes. Between June 2nd and June 9th, the Lyxor Hedge Fund Index was down 1.2 per cent, while the Eurostoxx 50 and the S&P 500 were  down 3 per cent and 1.4 per cent respectively. In parallel, the positive correlation between equities and bonds implies that 10-year bond prices fell by -2.4 per cent (Germany) and -1.3 per cent (US). Credit was again somewhat resilient, though US high yields spreads widened 17bp, translating into a -1 per cent weekly performance according to Merrill Lynch credit indices.

From the perspective of hedge fund strategies the Lyxor CTA Broad Index experienced a 2.2 per cent drawdown, bringing the cumulative fall, month to date, to -3.9 per cent. The biggest detractor last week was the equity bag which was strongly impacted by the global sell-off in stock prices. The US stockmarket was the main negative contributor, followed by Europe and Asia. Commodities and FX also detracted the strategy’s performance.

Meanwhile, L/S Equity suffered on the back of the underperformance of Asian managers. This follows stellar returns from long biased L/S Equity managers earlier in the year and is in line with our cautious message expressed at end-May. As expected, market neutral L/S Equity funds were fairly resilient as well.

On a positive note, fixed income arbitrage was able to benefit from the higher volatility in fixed income markets. Merger arbitrage also outperformed other hedge fund strategies, though it delivered negative returns during the week at -0.4 per cent.

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