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High dispersion of hedge funds’ returns in panic markets

The deflation and growth scares morphed into a vicious cycle last week. Multiple trading anomalies were observed, especially on Monday, suggesting that systematic and algorithmic trading amplified the sell-off.

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The deflation and growth scares morphed into a vicious cycle last week. Multiple trading anomalies were observed, especially on Monday, suggesting that systematic and algorithmic trading amplified the sell-off.

The bottoming process has already begun, but the sentiment remains febrile. On the one hand, the apparent disconnection of this sell-off with macro data is opening bargain opportunities. On the other hand investors are pondering whether a more fundamental change is being priced in, which would suggest a more bearish phase for risky assets.

Current concerns include:

  • The true magnitude of the Chinese slowdown
  • The risk of an FX crisis in some of the weakest EM countries
  • The actual resilience of global growth to another round of deflationary pressures
  • The uncertainty around the Fed’s normalization (the plunge in EM assets and commodities follows the April rout for sovereign bonds)
  • Monetary policies’ ability to deal with any of these potential shocks.

Over the week, global equities plunged by 9%, the USD trade weighted dropped by more than 2.5%, energy spots plunged by another 10% and base metals lost 4%.

The Lyxor Hedge Fund Index was down 3.5% over the same period. Event Driven funds were the main losers. There was high dispersion in managers’ return, with losses in some heavy-weight funds.

Overall, CTAs and Fixed Income Arbitrage funds proved to be reasonably resilient. A milder pressure on credit and govies supported credit strategies.

The losses in the L/S Equity space were reasonable, with the notable exception of Asian and US long bias managers. A high dispersion was recorded among Global Macro funds.

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Jean-Baptiste Berthon , Philippe Ferreira , September 2015

Article also available in : English EN | français FR

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