Lyxor: what happened to hedge funds’ alpha since the summer?
25 September 2018 London
Image: Shutterstock
“While hedge funds’ performance and alpha were honourable until the summer, our analysis suggests that they erased about 2.5 percent of alpha since June, with no turn in sight yet in September”, according to Lyxor’s most recent Weekly Brief.
In the brief, ‘What happened to hedge funds’ alpha since the summer?’, Lyxor’s Cross Asset Research team explained that there was also “no turn in sight yet in September” for hedge fund performance and alpha.
Long and short (L/S) equity funds were the primary culprits and victims in recent months, Lyxor said as it broke down hedge fund performance by region.
Lyxor stated in the US, managers had steadily reduced their overall net exposure and leverage since Q2.
It added: “As a result, they partially missed the summer rally. The plunge in momentum also cost in June, only partially recovered afterwards.”
In Europe, funds adequately reduced their overall exposures ahead of the summer, Lyxor found.
It stated: “Unfortunately, many funds were too early in chasing value stocks, which continued to correct.”
Lyxor found in Asia, funds had also turned cautious before the summer. However, they were caught in their long tech and Chinese positions, which strongly underperformed main markets, it stated.
The asset research team found across the equity space, neutral funds also suffered.
Lyxor said: “In addition to the major swings in momentum in the US and in Asia, and in value in Europe, most other factors also proved volatile. It steadily eroded their returns.”
Lyxor concluded: “In our view, the difficult summer for hedge funds in general, and for L/S equity funds, largely results from one central cause—worldwide policy uncertainty.”
“The shifts in trade expectations, vulnerable progress in Italy and UK, the anti-establishment push in a number of developing markets and emerging markets countries, the intensifying use of economic sanctions all keep market in feverish stance, with a limited source of uncorrelated returns. It prevents managers from deploying their strategy successfully.”
In the brief, ‘What happened to hedge funds’ alpha since the summer?’, Lyxor’s Cross Asset Research team explained that there was also “no turn in sight yet in September” for hedge fund performance and alpha.
Long and short (L/S) equity funds were the primary culprits and victims in recent months, Lyxor said as it broke down hedge fund performance by region.
Lyxor stated in the US, managers had steadily reduced their overall net exposure and leverage since Q2.
It added: “As a result, they partially missed the summer rally. The plunge in momentum also cost in June, only partially recovered afterwards.”
In Europe, funds adequately reduced their overall exposures ahead of the summer, Lyxor found.
It stated: “Unfortunately, many funds were too early in chasing value stocks, which continued to correct.”
Lyxor found in Asia, funds had also turned cautious before the summer. However, they were caught in their long tech and Chinese positions, which strongly underperformed main markets, it stated.
The asset research team found across the equity space, neutral funds also suffered.
Lyxor said: “In addition to the major swings in momentum in the US and in Asia, and in value in Europe, most other factors also proved volatile. It steadily eroded their returns.”
Lyxor concluded: “In our view, the difficult summer for hedge funds in general, and for L/S equity funds, largely results from one central cause—worldwide policy uncertainty.”
“The shifts in trade expectations, vulnerable progress in Italy and UK, the anti-establishment push in a number of developing markets and emerging markets countries, the intensifying use of economic sanctions all keep market in feverish stance, with a limited source of uncorrelated returns. It prevents managers from deploying their strategy successfully.”
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