The Lyxor Hedge Fund index was up a healthy +0.7% since the beginning of August, with progress in most strategies, supported by the positive performance of risky assets.
The Bank of England’s activism and the Brexit timeline getting pushed back contributed toward easing investors’ fears. Meanwhile, a patient Fed kept the dollar and yields under pressure. Economic releases were mixed but evidenced the resilience of developed market consumers.
Finally, the recovery in oil prices supported emerging markets assets and credit. While cautiousness remains elevated and trading volumes remain low, better asset returns lifted some pressure off investors’ shoulders. Hedge funds’ portfolios, which have been substantially reshuffled since the UK referendum, also reflect a cautious addition of risk. Below, we highlight the most significant changes:
Over the course of the summer, CTAs doubled their equity net exposure. They neutralized their commodity positions, with longs in metals offset by shorts in energy and agricultural. They kept their dollar shorts and long Euro bonds, but reduced their long U.S. bonds.
Macro funds remain mildly long equities (but short U.S. indices). They rebuilt relative trades in precious metals and energy. They remained unanimously short U.S. bonds and long USD, especially vs. EUR and GBP. The most significant disparities can be found in European and Japanese positions.
Event driven funds gradually increased risk. Merger funds raised exposure to European deals, and to the technology and communication sectors. Special Situation funds raised their stakes in resources, consumer non-cyclical and technology.
L/S Equity funds mildly raised their exposures. U.S. managers reinforced their stakes in the resources and financial sectors. Their European peers preferred the high yielding stocks.
Japanese funds returned to financials amid receding prospects of negative rate policy.
These portfolio changes emphasize both lower risk aversion and a persisting wait-and-see stance. The decline in U.S. bonds positions is consistent with rising Fed concerns.
