More balanced ahead of the summer

Risk assets range-traded before rallying after Yellen’s dovish testimony before Congress and amid positive economic prints in the U.S. and Eurozone. Releases in the U.S. suggested healthy activity and job growth.

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European data were consistent with a sustainable recovery. Robust global growth and central banks’ [very] cautious optimism revived the reflation trade. Yields were up in Europe, USD further weakened and dollarassets progressed, including EM markets and base metals.

Prior to Yellen’s speech, the week was benign for hedge funds. L/S Equity produced alpha due to a pause in the tech selloff and profitable stock picking in industrials. Special Situations funds also delivered mild gains, especially in their communication positions. CTAs recovered some of the lost ground due to their short on energy and EUR, as well as from some of their equity indices. Macro funds were mild detractors, mainly in their Euro vs. U.S. equity and FX stances.

How are hedge funds positioned ahead of the summer? Overall, they tend to be more hedged and to favor relative exposures.

CTAs remain structurally long equities in most regions. They are rebuilding their bond exposures, predominantly in Europe. They turned short USD, mainly against non-G10 currencies. They are short on Energy and Agricultural contracts.

Macro funds at Lyxor keep on arbitraging Europe vs. the U.S.. They play the European recovery through equity longs and bond shorts, hedged with shorts on EUR crosses. Interestingly, they recently turned net long on USD. Finally, they also went long agricultural contracts, while keeping their long energy stance.

L/S Equity funds in the U.S. marginally increased their net exposures, but are increasingly sector-balanced. They are now long financials. In Europe (all bias included), funds tend to rotate toward a tilt on Communication and Industrial stocks. They are still long financials, but less than a quarter ago.

Event Driven funds substantially reduced their overall net exposure, mainly through profit taking in healthcare and technology issues. They remain balanced between cyclical and defensive sectors.

Lyxor Research , July 2017

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