Hedge Funds Show Resilience Ahead of Election Day

Risk aversion rose over the recent days as Election Day approaches in the U.S. and the gap between Clinton and Trump in the polls has narrowed. During the period under review, both equities and bonds delivered negative returns, while credit spreads widened and energy commodities fell markedly.

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This market environment has proved difficult to navigate for hedge funds, considering the positive correlation between equities and bonds. However, on balance, they proved to be relatively resilient. The Lyxor Hedge Fund index was down 1% last week. Long term CTAs suffered a drawdown on the back of their long equity and long fixed income positions. Their long energy positions also proved harmful. Global Macro managers delivered negative returns on the back of their short EUR vs. USD positions. Meanwhile, their short GBP vs. USD is at risk considering the change of tone of the Bank of England which is unlikely to adopt additional expansionary measures.

Overall, all hedge fund strategies were in the red last week, however, fixed income arbitrage players outperformed. The best performing manager last week was a relative value arbitrageur in the mortgage backed security space. Going forward, we stick to our investment recommendations which have performed well.

Our preference for short term CTAs versus long term ones has paid off. In the same vein, our preference for merger arbitrage over special situations in Event-Driven has proved beneficial. Finally, our overweight stance on both market neutral L/S Equity and relative value/fixed income arbitrage strategies has proved adequate. In relative terms, we prefer Event-Driven over L/S Equity and keep both Macro and CTAs at neutral.

Beyond U.S. Election Day, we believe that the Italian referendum early December has the potential to cause market jitters. As a result we remain defensive in our investment recommendations for both traditional and alternative asset classes for the time being and look for attractive entry points in the near term to add risk in portfolios.

Lyxor Research , November 2016

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