Higher volatility puts low beta strategies in a sweet spot, says Lyxor
10 September 2018 London
Image: Shutterstock
With the US equity market under selling pressure early September, the MSCI World has registered its worst week since late March, down almost 1.5 percent, according to Lyxor’s weekly briefing.
This occurred in a context where the probability of an escalation of trade tensions between the US and China has increased, Lyxor said.
The investment company explained: “The deadline to make public comments on $200 billion of proposed US tariffs on China’s imports was last Thursday (6 September).”
Early August, US President Donald Trump signalled the tariff could be as high as 25 percent. Meanwhile, emerging markets assets continued to sell off.
In the hedge fund space, low beta strategies outperformed last week. Of this, Lyxor said: “Merger arbitrage, which has structurally a low beta versus equity markets, was the sole strategy in positive territory.”
It added: “Positive contributors to performance include the Aetna versus CVS deal whose deal spread tightened on the back of media reports suggesting the Department of Justice (DoJ) may approve the deal within the next few weeks.”
Meanwhile, commodity trading advisors were flat despite their long US equities positions and fixed income arbitrage was slightly down.
Lyxor reported strategies with a higher market beta, such as long/short (L/S) equity and special situations were down 1.2 percent and 0.8 percent, respectively.
Over the summer, L/S equity funds took more directionality by increasing market-beta. Funds also recently rebuilt their tilt to cyclicals, which was harmful in early September, stated Lyxor.
In terms of investment recommendations, Lyxor said it “maintained an overweight stance on merger arbitrage until now and we reaffirm it”.
It added: “The strategy appears to be perfectly fit for current market conditions, where downside risks remain elevated amidst high political uncertainty and rich valuations across equity markets. Deal spreads have narrowed lately but the strategy maintains its appeal thanks to its low volatility in returns and low correlation to traditional assets.”
Lyxor concluded: “Mergers and acquisitions will probably be softer in Q3 compared to the same quarter in the past two years, but it is still strong in absolute terms.”
This occurred in a context where the probability of an escalation of trade tensions between the US and China has increased, Lyxor said.
The investment company explained: “The deadline to make public comments on $200 billion of proposed US tariffs on China’s imports was last Thursday (6 September).”
Early August, US President Donald Trump signalled the tariff could be as high as 25 percent. Meanwhile, emerging markets assets continued to sell off.
In the hedge fund space, low beta strategies outperformed last week. Of this, Lyxor said: “Merger arbitrage, which has structurally a low beta versus equity markets, was the sole strategy in positive territory.”
It added: “Positive contributors to performance include the Aetna versus CVS deal whose deal spread tightened on the back of media reports suggesting the Department of Justice (DoJ) may approve the deal within the next few weeks.”
Meanwhile, commodity trading advisors were flat despite their long US equities positions and fixed income arbitrage was slightly down.
Lyxor reported strategies with a higher market beta, such as long/short (L/S) equity and special situations were down 1.2 percent and 0.8 percent, respectively.
Over the summer, L/S equity funds took more directionality by increasing market-beta. Funds also recently rebuilt their tilt to cyclicals, which was harmful in early September, stated Lyxor.
In terms of investment recommendations, Lyxor said it “maintained an overweight stance on merger arbitrage until now and we reaffirm it”.
It added: “The strategy appears to be perfectly fit for current market conditions, where downside risks remain elevated amidst high political uncertainty and rich valuations across equity markets. Deal spreads have narrowed lately but the strategy maintains its appeal thanks to its low volatility in returns and low correlation to traditional assets.”
Lyxor concluded: “Mergers and acquisitions will probably be softer in Q3 compared to the same quarter in the past two years, but it is still strong in absolute terms.”
NO FEE, NO RISK
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
