Risk assets were once again on the rise in July and several asset classes broke records. Last week, the S&P 500 reached an all-time high, while the spot VIX index reached an all-time low. The MSCI World (net total return local currency index) is up for the ninth month in a row, which was unseen since 1987.
Meanwhile, Euro high yield spreads reached 10-year lows according to Merrill Lynch indices. The latest leg of the rally is taking place amid a strong earnings season on both sides of the Atlantic, with U.S. technology stocks leading the pack. In spite of the strong momentum, we fear markets may have jumped the gun on monetary stimulus and more prudent investors might choose not to chase the rally at this point.
In the hedge fund space, recent trends can be looked from different perspectives. On the one hand, the strategies that did well over the recent months and which we have maintained an overweight position for several quarters outperformed in July. Event-Driven and Fixed Income strategies led the pack last week, in July, and year-to-date. On the other hand, trend following strategies underperformed during all these timeframes. Overall, considering the elevated weight of CTA and Global Macro strategies in our indices, the Lyxor Hedge Fund Index was flat in July. CTAs continue to be penalized by their commodity allocations as short positions on both energy and precious metals suffered last week.
Event-Driven is a strategy on which we maintain an overweight stance. Last week, performances were led by the energy, health care and consumer cyclical sectors. Merger Arbitrage outperformed special situations in July and is a strategy that appears particularly appealing in the context of richly valued traditional assets. Over the past five years, the beta of the strategy (vs. MSCI World) was in the 5-15% range, depending on the index.
Finally, sustained flows into alternative UCITs in Europe suggest investors are currently diversifying their assets at an elevated pace. The asset class experienced inflows up to EUR 4.5 billion in June and EUR 23 billion year-to-date. This is above the figure observed in H1-16. With regards to flows, the last section of the report deals with mutual funds domiciled in the U.S. and tracking European equities. Flows into such funds experienced a reversal recently, suggesting that appetite for European stocks is rising in the U.S.
