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Event Driven Moves Higher On Trump’s Market Rally

With U.S. data releases in the black and the Fed ready to act, Treasury yields kept creeping higher over the recent weeks. Meanwhile, the ECB recently signaled it may extend its bond buying program at the current € 80bn per month beyond March 2017 (the final decision is likely to be announced on December 8th).

This has led to growing divergence between Treasuries and Bunds across the yield curve and further depreciation of the EUR vs. the USD.

This environment has been supportive for hedge funds. Most strategies delivered positive returns last week as risk assets moved higher on Trump’s market rally. Event Driven outperformed as spreads tightened for deals such as Time Warner/AT&T, Monsanto/Bayer, LinkedIn/Microsoft and Alere/Abbott. Such deals rank well in Merger Arbitrage portfolios. On the Special Situations segment, positive developments in Marathon Petroleum and Conagra Brands contributed to returns.

Global Macro and L/S Equity strategies also delivered solid returns last week. The former is well positioned to benefit from the divergence between Europe and the U.S. discussed above. With regards to L/S Equity, Long Biased managers outperformed other sub strategies. The best performer was a value L/S manager (up 3% last week, 13% YTD). At the other end of the spectrum, CTAs were flat and continued to underperform.

As part of the new market regime that has started to take shape after the election of Donald Trump, we have proceeded with some changes in our investment recommendations. We have downgraded Short Term CTAs to make room for an upgrade in L/S Equity Long Bias.

We now keep both Short and Long Term CTAs at neutral. Meanwhile, we find Market Neutral L/S Equity to be less appealing while the opportunity set for Special Situations has improved. The likelihood that U.S. corporates will repatriate their cash held overseas under the new administration may translate into shareholder friendly policies (dividend distribution or share buybacks) or more mergers and acquisitions. This creates opportunities for Special Situations managers which we have upgraded at slight overweight.

Lyxor Research , November 2016

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