Markets are on the brink to exit a much stock-friendly cycle, according to Moez Bousarsar, deputy head of Hedge Fund Selection at Lyxor Asset Management.
Though, speaking to InvestmentEurope, Bousarsar says he keeps a preference towards equities over credit at this point. A few signals have emerged since the start of 2018 he pinpoints, referring among others to the return of the volatility that has broken abruptly earnings’ continuous increase, to the very weak inflation experienced over the last couple of years and to the positive growth momentum in investors’ portfolios.
“Multiples have appreciated significantly. The stress episode markets experienced at the start of 2018 has raised concerns of investors around the appropriate level of stocks’ multiples. We have the feeling investors believe stock markets are set to turn range-bound. A directional equity exposure will therefore not provide the same returns than in 2017,” Lyxor’s deputy head of Hedge Fund Selection says.
He adds: “We have reached an inflection point. The environment starts to be supportive of hedge funds strategies. That will enable managers with ability to adjust their allocation in an aggressive and dynamic fashion to pick winners on the long equity side and losers on the short book.”
Bousarsar highlights that investors have started to move away from stocks markets to money market funds since yields return. He deems that will not only put pressure on equity markets but also clean them, presuming that in the end, only pure players will remain.
“Beta play is over, it is time to consider alternative approaches that can generate alpha on both long and short books and help to contain the downside risk,” he assesses.
Green light for L/S equity and merger arbitrage strategies
Bousarsar reveals current standard allocation in a Lyxor’s fund of hedge funds consists of a third of long short equity strategies, a third of global macro and CTA strategies, 15% of event driven funds with a focus on hard catalysts, 10% of credit while the remaining are multi-strategies hedge funds.
And dispersion in performance is widening in the hedge fund landscape, he observes. Good performers include merger arbitrage strategies and L/S equity funds carrying variable biases. In Bousarsar’s opinion, quantitative approaches will benefit from more dispersion and more volatility in the markets.
“Technical factors push good and bad businesses in the same direction rendering difficult any distinction for a number of investors. Markets have rewarded companies with secular growth stories but also high leveraged companies seeking cheap financing and a possibility to reshape their balance sheet,” he argues.
Bousarsar praises the resilience of global macro funds while he notes risk premia and CTA strategies have plunged since the start of 2018.
“They are yet to deliver expected returns. Swings and trend reversal seen in markets have not helped them to perform. We express a preference for multi-assets global macro funds for diversification purposes and varying income streams in an uncorrelated way,” he expounds.
“Tail risk hedging is a trend we have seen in certain hedge funds portfolios. It consists of taking positions like options on currencies or sovereign CDS. Hedge fund managers want to focus much on the core of their portfolio and they do not want any noise or exogenous factor to affect their performance. Tail risk hedging means paying an insurance premia in the event all assets would severely drop at the same time and to hedge against a potential macro risk. The insurance premia will mitigate losses,” explains Bousarsar.
Lyxor no longer a seeder
Lyxor has set a target of numbering 25 funds and $6bn (€5.2bn) of assets under management on its platform over the next three years. Currently, the platform stands at 12 funds and $3.5bn (€3bn) in AUM.
“2018 is a busy year in terms of partnerships. We distribute our products in Europe but also in Asia. Our next focuses will be on LatAm and Canada where Ucits has democratised hedge fund investments,” comments Bousarsar.
Strategies Lyxor’s hedge fund selection unit look for at the moment include academic risk premia – encompassing trend following, event equity and carry, market neutral long/short equity, statistical arbitrage, discretionary global macro and long only emerging market debt.
“Our approach has evolved as we integrate insights from our sales teams on the ground in order to propose an offering that is in adequation with investors’ wishes. Therefore launching an alt Ucits fund with internal seed capital is no longer viable in our view, we rather launch alt Ucits funds with a strong financial commitment from investors as from day 1,” Bousarsar concludes.