Hedge funds advance in march, looking beyond Europe

March was dominated by political turmoil in Italy and the specter of a bank run in Cyprus. The above-mentioned events are signs that the European debt crisis is far away from being solved. On the other hand, US economic momentum keeps improving and by endorsing Kuroda as the new BoJ governor, markets expect Japan’s economy to move to the tune of Abenomics.

Markets proved resilient, despite the Italian turmoil and Cyprus bailout. It seems that equities’ attractive valuations outweigh the potential risks. Since Japan joined the camp of aggressive monetary policymakers, investors are triggered to turn towards equities. Developed markets generally strengthened, led by a growth of 4.9% in Japanese equities, shrugging off concern about European developments and adopting a positive stance toward supportive US data. The fear of financial stress was spread to Emerging markets that lost about -2.2%. On the fixed income space, both safe-havens and credit products performed. Credit spreads compressed about -32 bps for HY. The Japanese yen continues to depreciate while USD gained against EUR on the ground of political developments. Commodities are back into the positive performance zone and volatility retraced from the previous month’s increase.

Hedge funds appreciated again during March, fueled by the ongoing normalization of market structure and modest but positive growth prospects. However, the Cyprus crisis weighed on risk appetite over the month, especially on European markets.

L/S Equity funds still outperformed the overall space of hedge funds. L/S Equity Long and Variable fund managers showed optimism regarding the reward of beta. They maintained their exposure on equities on the back of supportive valuations, decent economic growth, and still deployed excess liquidity. In that environment, the upward trend in risky assets on a global level was not expected to end soon. The L/S Equity Long and Variable Bias indices returned 1.41% and 0.40% respectively. On the other hand, L/S Equity Market Neutral and Statistical Arbitrage fund managers still enjoyed a trading environment where correlations have come down, stock dispersion is picking up and volatility remains at manageable levels. L/S Equity Market Neutral and Statistical Arbitrage funds gained respectively 0.36% and 0.82%.

Event Driven hedge funds slightly appreciated over the month. Distressed securities funds performed through credit investments in financial and energy names. The Lyxor Distressed Index registered a 0.99% gain this month. Special Situations managers suffered mainly from positions in the basic materials and government sectors. However, the Lyxor Special Situations Index registered a 2.09% gain over the month. Events on M&A deals were muted and merger arbitrage managers mainly gained on the spread fluctuations. The Lyxor Merger Arbitrage Index registered a 1.14% advance in March.

In the fixed income space, Credit related strategies were the most affected by negative developments in the Cyprus bailout case, bringing some volatility on European and, more broadly, global markets.

Emerging credit managers were the main losers due to their high beta exposures. Finally, spreads on European credit default swaps slightly improved on peripheral countries during the last week. Specifically, Greek bonds improved, while emerging sovereign bonds posted mixed performances. The Lyxor L/S Credit Arbitrage Index lost -0.51% in March.

The L/S Convertible thematic benefited from the continuous upward trend experienced in the equity space and from the decent performance of credit markets.

On the other hand, volatility declined on both U.S. and European equities, and the primary market was very active. The Lyxor Convertible Bonds Arbitrage Index yielded 0.99% over the month.

Global Macro strategies recorded mixed performances, with a negative contribution of their commodity exposures which offset the positive exposures to FX and bonds.

Additional losses came from the funds’ largely shared long positions in Western Europe equity indices, as a result of the situation in Cyprus. The Lyxor Global Macro Index lost -0.14% over the month. Long term CTAs ended the month in positive territory thanks to their equity exposures. Long Term CTAs’ managers have increased their equity exposures over bonds in risk allocation terms since the beginning of the year. The Lyxor CTA Long Term Index advanced 1.02% in March. By contrast, high frequency funds still posted mixed performances.

“Despite the European political and economic turbulences in March, hedge fund managers continue to focus on the encouraging macro news flow generated in the US and the upward trend in risky assets is not expected to end soon ” says Stefan Keller, Head of Managed Account Platform Research & External Relations at Lyxor AM.