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Short Term CTAs to the Rescue

Overall, the Lyxor Hedge Fund index is down 1.2% during the period under review, while the S&P 500 is down almost 2%. The sophisticated risk management practices of hedge funds are now being tested. Some funds are actually doing well in the current environment.

As the Fed’s QE exit approaches and recession fears in the eurozone resurface, market tensions have shown to be on the rise last week. Stocks and commodities are sharply down, equity volatility is up and bond yields have fallen to levels last reached in Q2-13 during the taper tantrum. Interestingly, emerging markets (both equities and bonds) and cash credit have proven resilient.

In the alternatives space, short term CTAs and less correlated strategies such as multi strategy, dividend futures and EM funds have been able to navigate the turmoil.

On the negative side, special situations extended their losing streak. They suffered from negative events impacting specific issuers such as Fannie Mae and Freddie Mac. This is taking place in the wake of a court ruling on September 30 that rejected the claim by investors that the sweep on the profits of the entities imposed by the US Treasury a few years ago was an illegal “taking”. Since this announcement their stock price has fallen by 40%.

Overall, the Lyxor Hedge Fund index is down 1.2% during the period under review, while the S&P 500 is down almost 2%. The sophisticated risk management practices of hedge funds are now being tested. Some funds are actually doing well in the current environment. Dispersion in returns rose significantly since the beginning of September, as shown by the chart below. Picking up the right strategy and selecting the right funds is now more critical than ever. Until conditions stabilize, short term CTAs are proving the most capable to track the fast changing environment ahead of the Fed’s QE exit. Changing monetary conditions have always shown to have a disruptive impact on markets.

Source: Lyxor AM

Philippe Ferreira , October 2014

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