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Low beta strategies outperform in unstable market conditions

Recent unstable market conditions have proved supportive for hedge funds, in relative terms, with liquid hedge fund benchmarks were down 1 per cent in March, and Distressed and Special Situations strategies underperforming. 

That’s according to the latest Weekly Brief from Lyxor’s Cross Asset Research team which also says that on a positive note, low beta strategies did well and CTAs managed to limit losses, in particular during the rise in risk aversion over the last two weeks. Short USD and long commodity positions proved rewarding for them as the US dollar depreciated and commodities jumped in the context of looming trade wars. Long equity positions detracted however. 

Meanwhile, Merger Arbitrage, Fixed Income Arbitrage and L/S Equity Market Neutral strategies also outperformed hedge fund benchmarks in March and over the last two weeks. These are typical low beta strategies that are increasingly attractive as the tradeoff between strong growth and monetary tightening is set to translate into a structurally higher volatility regime. Merger Arbitrage is especially attractive in the context of strong M&A volumes thus far in 2018.

Lyxor writes: “In the near term, we believe risk assets could experience a short term rebound. The great health of the US economy and our expectation that Trump’s fierce rhetoric over protectionism could have reached a peak, at least temporarily, is supportive. Yet, longer term, our appetite for risk is diminishing. 

“In terms of hedge fund recommendations, that will gradually translate into a re-weighting of low beta strategies (we currently maintain an Overweight stance on Merger Arbitrage and Fixed Income Arbitrage, but we are Underweight CTAs and at benchmark on Market Neutral L/S) and a downgrade of high beta strategies such as Special Situations, on which we are currently Overweight.”

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