lyxor-weekly-brief-11-july-161

THE WEEKLY BRIEF

11 July 2016

by LYXOR CROSS ASSET RESEARCH

CTAs’ Winning Streak Continues

Market developments after the Brexit referendum were somewhat puzzling. The market decline was short lived and risk assets rebounded as if nothing disruptive had happened.

The MSCI world is up 5.7% since June 27th (up to July 8th) and is now close to year-to-date highs. Additionally, credit spreads narrowed in the U.S., Europe and emerging markets.

Philippe Ferreira Senior Strategist philippe.ferreira@lyxor.com

Nonetheless, other market segments provided a contrasting picture. Bond yields continued to fall to record lows in the developed world. Ten-year Treasury yields fell below 1.4% last week, setting a new record. The German sovereign yield curve is in negative territory up to 15 years. A sovereign Swiss bond maturing in 2064 entered negative territory last week.

According to Fitch, there is a staggering USD 11.7 trillion in negative yielding debt at endJune, a USD 1.3 trillion rise in one month.

Anne Mauny Research Analyst anne.mauny@lyxor.com

Jean-Baptiste Berthon Senior Strategist jean-baptiste.berthon@lyxor.com

Lionel Melin Strategist lionel.melin@lyxor.com

Jeanne Asseraf-Bitton Global Head of Cross Asset Research jeanne.asseraf-bitton@lyxor.com

This environment continued to be supportive for CTAs. They maintain sizeable long fixed income positions in Europe, the U.S. and Japan. As a result, the Lyxor CTA Broad index is up by 2.2% during the first week of July. That follows the spectacular returns delivered during the last week of June (+4.2%). The strategy is currently the best performer year-todate, up 4.3%, and its positioning is geared towards a global deflationary spiral. We continue to believe that CTAs provide attractive portfolio diversification benefits.

The remaining hedge fund strategies were also in the black last week. That contributed to lift the Lyxor Hedge Fund index by 0.6% in early Q3 after a 1.7% loss in Q2. It is interesting to note that post-Brexit, hedge funds have significantly cut their equity beta, which is reassuring considering the near term uncertainty around the Brexit impact on the real economy, especially in Europe.

Our view remains in favor of hedge fund strategies with limited market directionality. It implies a preference for merger arbitrage versus special situations in Event Driven, a preference for variable biased and market neutral managers in L/S Equity, and a preference for Fixed Income Arbitrage versus L/S Credit. We also maintain the slight overweight stance on CTAs as a result of our defensive views on traditional assets.

Hedge funds seek immunization from market swings in the aftermath of the Brexit outcome Median equity beta on the Lyxor Platform 50%

40%

May 2011: hedge f unds start to anticipate the summer storm

May 2013: hedge f unds cut risk as the Fed signals tapering

50% Aug 2015: China dev alues its currency

40%

30%

June 2016: Brexit f allout 30%

20%

20%

Draghi pledges to do "whatev er it takes"

10%

0% Jan-11

Jul-11

February 2016: Fed rev erses hawkish stance

10%

0% Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 The median equity beta is calculated for each fund as the beta of each stock position to its benchmark, weighted by holding.

As of 28/06/2016. Source: Lyxor AM

THIS DOCUMENT IS FOR THE EXCLUSIVE USE OF INVESTORS ACTING ON THEIR OWN ACCOUNT AND CATEGORISED EITHER AS “ELIGIBLE COUNTERPARTIES” OR “PROFESSIONAL CLIENTS” WITHIN THE MEANING OF MARKETS IN FINANCIAL INSTRUMENTS DIRECTIVE 2004/39/CE OR QUALIFIED PURCHASERS WITHIN THE MEANING OF RELEVANT U.S. SECURITIES LAW. SEE IMPORTANT DISCLAIMERS AT THE END OF THIS DOCUMENT

1

THE WEEKLY BRIEF

11 July 2016

by LYXOR CROSS ASSET RESEARCH

THE WEEK IN 3 CHARTS Hedge Fund Snapshot: CTAs continue to outperform WTD*

MTD

YTD

Lyxor Hedge Fund Index

0.6%

0.6%

-3.0%

CTA Broad Index

2.2%

2.2%

4.3%

Event Driven Broad Index

0.5%

0.5%

-1.2%

Fixed Income Broad Index

0.6%

0.6%

-1.0%

L/S Equity Broad Index

0.8%

0.8%

-4.0%

Global Macro Index

0.0%

0.0%

-6.4%

S&P 500

2.6%

2.6%

0.5%

-9

-9

-93

10 Y US Treasury (Change in bps)

The week was supportive for hedge funds, with all strategies ending in positive territory. The Lyxor Hedge Fund Index was up 0.6%, fueled by the strong performance of CTAs. CTAs thrived from their positions last week. The fixed income bucket was again the main positive contributor, as sovereign bond yields continued to fall. The equity and commodity buckets were profitable as well. Short positions on the GBP also paid off.

As a result of the market rebound, more directional strategies outperformed last week: long bias, special situations (within event-driven) and L/S credit outperformed.

*Fro m 28 June to 05 July 2016

U.S. activity rebounded markedly in June Strong rebound in June in manufacturing and services sectors US ISM Puchasing Managers’ Index

The U.S. macro backdrop improved in June, with ISM indices picking up significantly.

The ISM manufacturing index climbed to its highest level in 16 months (53.2 in June, up from 51.3 in May) supported by both new orders and production indices in particular. Non-manufacturing activity was also well oriented, above expectations and the May printing.

U.S. economic fundamentals remain solid, with robust consumer confidence and consumer spending supporting strong job creation in June.

Source: ISM, Bloomberg, Lyxor AM

Future markets no longer price in a single U.S. rate hike in 2016 Level of policy rates expected at end-2016 Dec16 30 day Fed Fund Futures 1.6

1.6

1.4

1.4

1.2

1.2

1

1

0.8

0.8

0.6

0.6

0.4

0.4

0.2

0.2

0 Dec-14

Apr-15

Aug-15

Dec-15

Apr-16

0 Aug-16

Markets have significantly revised down Fed rate hike expectations over the recent months. The Fed minutes released on Wednesday confirmed this sentiment.

FOMC members remain in a wait-and-see mode, on the back of concerns over the US labor market and the impact of the Brexit over the global economy.

However, the U.S. Non-Farm payrolls rose strongly in June, by 287,000, far above expectations. This should confirm that the weak job report in May was probably an anomaly. But uncertainty over Brexit remains high, and with the U.S. election looming we think the Fed is unlikely to hike rates before December.

As of 07/06/2016. Source: Bloomberg, Lyxor AM.

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THE WEEKLY BRIEF

11 July 2016

by LYXOR CROSS ASSET RESEARCH

CTAs

All trends paid off WTD*

MTD

YTD

CTA Broad Index

2.2%

2.2%

4.3%

CTA Long Term

2.4%

2.4%

5.0%

CTA Short Term

1.1%

1.1%

-3.7%

*Fro m 28 June to 05 July 2016

CTAs continued to record strong results last week.

Long term systems outperformed short term ones, as they benefited from their long stance on equities.

In the fixed income portfolio, allocations to developed markets were profitable. Systems benefited from their exposure to the long end of yield curves, especially in the US.

CTAs positioning is geared towards a global deflationary spiral

Commodities contributed positively towards performance. Long positions on agriculturals and precious metals remained profitable.

Net Exposure to Fixed Income, % NAV

The FX bucket experienced globally positive results.

Funds continued to generate gains on their long positions on the Japanese Yen and short positions on the British pound vs. U.S. dollar.

In the equity cluster, outcomes were disparate across CTAs. Most funds benefited from the rebound of US and European equities as a result of their slightly long positions. Meanwhile, some short term systems suffered from their short exposure to developed markets.

As of 28/06/2016. Equally weighted. Source: Bloomberg, Lyxor AM

GLOBAL MACRO Global Macro Index

Discrepancy in returns WTD*

MTD

YTD

0.0%

0.0%

-6.4%

*Fro m 28 June to 05 July 2016

Macro managers gained on long European bond positions Net Exposure to Fixed Income, % NAV 50%

50%

40% 30%

40% North America

20%

10%

10%

0%

0% -10%

Japan

-20% -30% -40% Apr-15

-20% Western Europe

-30% -40%

Jul-15

The fixed income bucket brought mixed returns.

Predominantly positioned on relative value trades, a couple of managers successfully captured yield curve moves in particular from the flattening of the US and Swedish curves. Other funds posted losses from their directional strategy on the long end of the US yield curve.

30%

20%

-10%

The strategy was overall flat last week, but there was a wide discrepancy in returns across managers and within portfolios.

Oct-15

Jan-16

Outcomes in equities were also varied. The most constructive funds benefited from the recovery of the European and Japanese markets. However, bearish managers who significantly increased their short S&P exposure, suffered from the market rebound.

Short exposures on the GBP continued to provide healthy returns but gains were partially offset by the long USD allocation vs. other currencies.

Apr-16

As of 21/06/2016. Equally weighted. Source: Bloomberg, Lyxor AM

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THE WEEKLY BRIEF

11 July 2016

by LYXOR CROSS ASSET RESEARCH

L/S EQUITY

Directionality worked well

L/S Equity Broad Index

WTD*

MTD

YTD

0.8%

0.8%

-4.0%

Long Bias

1.3%

1.3%

-2.5%

Market Neutral

-0.4%

-0.4%

-5.0%

Variable Bias

0.9%

0.9%

-4.8%

*Fro m 28 June to 05 July 2016

Long exposure to consumer non-cyclicals paid off Net Exposure to Sectors vs performance of MSCI World sectors, % NAV Weekly Perf ormance 5% Utilities

Consumer non-cy clicals

In the wake of the Brexit fallout, equity markets puzzlingly rallied across the globe. L/S Equity funds recorded strong returns as a result, with Long Bias funds outperforming.

Gains were realized on both developed and emerging markets. U.S. managers were the best performers.

They have maintained both a high net exposure and equity beta, which enabled them to benefit from part of the upside market moves. All sectors had a positive week but long positions on the consumer non-cyclical, industrial and telecom sectors proved particularly rewarding.

Materials

4%

Communications Energy

3%

Industrials Consumer Cy clicals Technology

2%

Financials

In Europe, funds managed to extract alpha. Yet they were less successful than their US peers as they significantly reduced their net exposure. Most sectors experienced strong momentum as well, especially the energy, utilities and consumer cyclical sectors.

1% Exposure (% NAV) 0%

0%

2%

4%

6%

8%

10%

12%

Multi-strategy managers made some profits on their long books and their trend following models.

As of 28/06/2016. Equally weighted. Source: Lyxor AM

EVENT DRIVEN

Special Situations outperformed WTD*

MTD

YTD

Event Driven Broad Index

0.5%

0.5%

-1.2%

Merger Arbitrage

0.4%

0.4%

0.6%

Special Situations

0.6%

0.6%

-4.6%

*Fro m 28 June to 05 July 2016

Managers increased exposure to consumer non-cyclicals Net Exposure to Sectors, % NAV

Consumer non-cy clicals

In an environment where macro headlines are predominant, event driven managers kicked off the third quarter on a positive note.

Special situations funds outperformed merger arbitrage strategies last week, with gains led by investments in the consumer non-cyclical, basic materials and communications sectors. However, hedges and exposure to financials and industrials partially offset the gains. Managers’ core holdings such as Shire, Allergan, Baxter and Microsoft went through a v-shaped recovery after the Brexit vote.

AB Inbev – SABMiller’s mega merger received conditional antitrust approval from South Africa’s regulator and moved a step closer to completion. Ball Corp. successfully completed the acquisition of Rexam. Both deals contributed positively to M&A portfolios.

Communications Consumer cy clicals Technology Financials Apr-16 Basic Materials Jun-16

Industrials Energy Utilities Others* -20%

-10%

0%

10%

20%

30%

As of 28/06/2016. Equally weighted. Source: Lyxor AM

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THE WEEKLY BRIEF

11 July 2016

by LYXOR CROSS ASSET RESEARCH

Recovered from the Brexit fallout

L/S CREDIT ARBITRAGE WTD*

MTD

YTD

Fixed Income Broad Index

0.6%

0.6%

-1.0%

L/S Credit Arbitrage

0.6%

0.6%

1.4%

*From 28 June to 05 July 2016 Bullish positions on junk bonds benefited from tighter spreads Merrill Lynch US and European High Yield Indices, Option Adjusted Spreads (bps) 900 850 800

US

750 700 650

600

Credit markets started to recover last week from the Brexit fallout. Both European and US credit markets posted a strong performance, particularly in the High Yield segment. On the cash side, spreads of the Merrill Lynch US and European High Yield indices tightened.

In Europe, financials delivered positive returns but lagged on a risk adjusted basis. Emerging markets followed the upward move as well.

Long/Short Credit funds recorded a positive performance. Asian managers led the pack, thriving from their positions on the energy sector and AT1 CoCo bonds. On the European side, some managers took profit from their positioning on the financials, communications and energy sectors. The others ended the week relatively flat, as gains on the corporate and financial buckets were offset by losses incurred on credit hedges.

550 500

Eur ope

450 400 Jan-16

Feb-16

Mar-16

Apr-16

May -16

Jun-16

Jul-16

As of 05/07/2016. Source: Bloomberg, Lyxor AM

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THE WEEKLY BRIEF

11 July 2016

by LYXOR CROSS ASSET RESEARCH

METHODOLOGY Breakdown of AUM by strategy

Multi-strategy 8%

L/S Credit & Fixed Income Arb. 3% Global Macro 25%

- USD 7.9 billion of assets under management (as of May 31, 2016)

L/S Equity 19%

- Replicating approximately USD 220 billion of AUM Ev ent Driv en & Risk Arb. 21%

CTAs 23%

As of 31 May 2016

Lyxor Hedge Fund Indices

Based on the complete range of funds available on the Lyxor Managed Account Platform, a universe of funds eligible for inclusion in the indices is defined on a monthly basis taking into account the following elements: -

Investability Threshold To be included in any index, the managed account must have at least $3 million of AuM.

-

Capacity Constraints All index components must possess adequate capacity to allow for smooth index replication in the context of a regular increase in investments.

-

Index Construction For each index, the relative weightings of the component funds are computed on an asset-weighted basis as adjusted by the relevant capacity factors.

-

Each Lyxor Hedge Fund Index is reviewed and rebalanced on a monthly basis.

-

The Index construction methodology has been designed to mitigate well-known measurement biases.

Inclusions and exclusions of new Hedge Funds do not impact the historical index track record.

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THE WEEKLY BRIEF

11 July 2016

by LYXOR CROSS ASSET RESEARCH

DISCLAIMER This material has been prepared solely for informational purposes only and does not constitute an offer, or a solicitation of an offer, to buy or sell any security or financial instrument, or to participate in any investment strategy. This material does not purport to summarize or contain all of the provisions that would be set forth in any offering memorandum. Any purchase or sale of any securities may be made only pursuant to a final offering memorandum. No advisory relationship is created by the receipt of this material. This material should not be construed as legal, business or tax advice. A more robust discussion of the risks and tax considerations involving in investing in a fund is available from the more complete disclosures incorporated into the offering documentation for such fund.

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Hedge funds may invest in futures and other derivative instruments. Futures trading and other derivatives may permit extremely high degrees of leverage and expose the funds to, among other things, volatility, market illiquidity, market risks, legal risks and operational risks. Hedge funds

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THE WEEKLY BRIEF

11 July 2016

by LYXOR CROSS ASSET RESEARCH may be exposed to risks relating to non-U.S. markets, including, without limitation, risks relating to currency exchange, tax, lack of liquidity, market manipulation, political instability and transaction costs. An investment in a hedge fund is subject to a total loss.

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