The positive streak of hedge funds continued last week: all strategies, except for the CTA funds, benefited from the stabilization of the market environment. The Lyxor Hedge Fund Index gained 0,5%, bringing its month-to-date performance to a solid +1,6%.
The Global Macro managers outperformed last week on the back of long US dollar positions. The publication of encouraging economic data in the US fueled expectations of a possible reversal of the very accommodative tone of the Fed at the FOMC meeting of 26-27 July.
The Lyxor hedge fund index has gained 1,6% since the beginning of the month and it was the strategies characterized by greater market directionality that benefited most from the latter's rebound. Both the long-oriented Special Situation and L/S Equity managers are up 3,3% month-to-date (as of July 19).
Cautious hedge fund managers quickly revised their equity beta upwards in July. More defensive managers, however, were not quick enough as the Brexit shock was offset by robust economic data releases. In July, the preliminary PMI indicators of the euro area indeed suggest the persistence of solid economic activity after the British referendum.
On a negative note, CTA funds are in arrears for the second week in a row. Rising government bond yields and certain long exposures to the Turkish lira versus the US dollar resulted in losses. The CTA strategy nonetheless remains in positive territory since the beginning of the month. We remain overweight CTAs, due to the attractive benefits they bring in terms of portfolio diversification and downside risk hedging, which we still consider significant.
Finally, the stock-level turnover factor, which saw a reversal in the momentum factor and a rebound in the value factor, mostly spared the L/S market neutral managers. The latter are momentum sensitive. The rotation was more marked in Asia in the wake of expectations of possible further accommodative interventions, both at the fiscal and monetary level, by the Japanese authorities.
The rebound in Asian value stocks benefited some pan-Asian quantitative L/S Equity managers after a difficult first half. We remain overweight L/S Equity market neutral funds as we believe the factor rotation has now ended. With the exception of Asia, we expect limited upside potential for US and European value stocks.
