Normalisation of Correlation and Dispersion Gives Hedge Funds Opportunities

By Jeanne Asseraf-Bitton, Head of Cross Asset Research, Lyxor Asset Management


Risk assets are set to generate positive returns for the remainder of 2013 driven by a slowly expanding global economy and ultra accommodative monetary policy. We believe that the familiar pattern from the last three years of 2Q data disappointment and consequent risk off is unlikely to repeat itself. ECB policies over the past year (OMT), in addition to liquidity from the Fed and Bank of England, should prevent contagion from idiosyncratic risk events like Cyprus or Italian elections. Global growth should also stay resilient because of spare capacity and reversion to the mean, though at modest levels.

Several risks are still highly visible including volatile economic data, the U.S. fiscal retrenchment and European austerity efforts. Emerging market growth is less dynamic than anticipated. These risks are well known and explain the generally high equity risk premiums globally. We believe that the world continues to normalize in 2013 and the reduced risk premium is the primary driver of equity returns. We have an attractive view of equities among the various asset classes. We continue to prefer equity over fixed income and favor developed over emerging equities.

The aggressive stimulus in Japan is the latest contribution to easy global monetary policy. The shift in policy regime is massive in size and scope. Authorities are determined to promote growth and pull Japan out of deflation. We believe the current rally has further to go and upgrade again our stance on Japanese equities.

Short term volatility is presenting attractive opportunities for alternative managers to monetize the moves and generate alpha beyond beta. In directional markets, managers are able to generate a better risk adjusted return than just getting the direction correct. In Emerging Markets, Commodities and Credit, hedge funds are our preferred way to gain non directional exposure in order to reduce volatility and increase risk-adjusted returns.


source: Lyxor Asset Management

The return of dispersion is widespread. Geographies, sectors and idiosyncratic factors are regaining their role in
determining performances. Falling correlations among equity markets, sectors and stocks are allowing equity L/S managers to use their investment process and local expertise to generate alpha. The normalization is also reaching commodity and foreign exchange markets offering hedge fund managers opportunities to trade. The remainder of 2013 is ripe for further differentiation.

In our Alternative Strategies ranking, while maintaining a bias to directional strategies, we upgrade L/S Equity discretionary and systematic market neutral strategies, which should benefit from a high dispersion, low volatility environment. Long term CTAs can perform well in a world with lowered tail risks and strong thematic trends. And in credit, the overall market appears richly valued and we advocate focusing investments on relative value funds with limited interest rate risks.



References: Lyxor AM, Cross Asset Research: Surfing on the Liquidity Wave, Second Quarter 2013,