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CTAs drag down hedge fund returns

The market reversal in early February took a heavy toll on CTAs and they are down almost 5 per cent on a month to date basis, according to the Lyxor CTA index.

Other measures of CTA performance point to a drawdown that was more severe, ie in the -5/ -10 per cent range. Meanwhile, their deleveraging during the selloff suggests they may have lagged the market recovery during the recent days.
Lyxor’s Cross Asset Research team writes: “On a positive note, the current positioning of CTAs is more balanced. Their future performance should thus be more in line with expectations; ie a lower correlation to equity markets. Actually, their extreme long positioning on equities over the recent months explains why we had a neutral position on the strategy for some time. We stick to that view for the time being as equity and fixed income markets might remain range bound in the wake of the recent movements. But it is important to note that CTAs are fast regaining their diversification benefits.
“The remaining hedge fund strategies were all in the red last week, with L/S Equity funds underperforming on a weekly basis. In particular, L/S Equity market neutral funds, who were resilient initially, suffered during the period under review, though performances were heterogeneous between funds.
“Finally, outperforming strategies on a month to date basis include Event-Driven and Fixed Income Arbitrage. As highlighted on several occasions in this report, Fixed Income Arbitrage tends to perform well in rising bond yield environments. We maintain an overweight stance on this strategy. The resilience of L/S Credit funds has much to do with the fact that credit markets were largely spared during the selloff. We maintain a preference for low beta L/S Credit funds versus high beta L/S Credit funds going forward. With regards to Event-Driven, merger arbitrage was highly resilient, as discussed in this report last week. On the contrary, special situations funds were negatively impacted by market movements as a result of their higher beta to equity markets. Overall, both strategies (Fixed Income Arbitrage and Event-Driven) are those on which we have maintained the strongest convictions lately (see report). We stick to these views in the near term.”

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