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A Dovish FOMC was Dovish for Hedge Funds

A more dovish FOMC than expected on March 16 offered the equity rally another leg up. The Fed shaved off its growth and inflation forecasts and its median dot was revised two notches down. Bond yields weakened and the downward pressure on the dollar further supported oil prices and EM assets.

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It benefitted most hedge funds strategies. CTAs recouped part of their recent losses on bonds. Global Macro funds’ gains on bonds were partially offset by losses in their long USD crosses (which were reinforced in early March). Structurally long bias strategies captured a favorable beta contribution. Finally, continued compression of credit and deal spreads supported Credit and Merger strategies.

Since then, several hawkish statements, in contradiction with the outright dovish FOMC, triggered a rebound in USD and a drag in most assets pegged to it.

This reversal is actually emphasizing growing nervousness regarding the current [fragile] market equilibrium. Vanishing concerns about China and a dovish Fed were building blocks of the rally (along with oil prices and improving US data). These fundamentals are well priced in. Now, with technical factors gradually exhausting and a scarcity of near-term monetary and economic catalysts, the focus might be shifting back to the macro wildcards still on the table. There are many of them.

In that context, hedge fund strategies rebuilt their exposures to risky assets but remain cautiously positioned (the Lyxor median equity beta snapped from 7% back to 15%, but remains below 23% long term average). We too are keeping a balanced exposure. We aim to capture directionality through tactical styles. Besides, we would exploit the elevated asset dispersion with relative-value approaches, focusing on the ones least correlated to the current themes.

Lyxor Research , March 31

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