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Lyxor Weekly Brief - Oct 23rd 2017

As the earnings season started in the U.S. and companies have so far delivered positive surprises, the momentum in risk assets has shown no signs of abating. The MSCI World (local currency) is on track to deliver its twelfth successive month of positive total returns, which is unprecedented since data is available back in the late 60s.

Such momentum in equities has contributed to fuel CTAs, which are set to outperform in October (+3.1% month to date as of October 17th). In line with equity market movements, CTAs’ net positioning on equities, at 112% of net assets, is at a maximum since we have data back in early 2012.

As a result, fund allocators might argue that investing in CTAs is now tantamount to buying equities. The 12 week correlation of CTA returns with the MSCI World has actually increased but remains low at 13% (see chart). The reason for this moderately low correlation between CTA and global equity returns is related to the fact that managed futures are multi asset strategies. In particular, their long positioning on fixed income contributes to explain the above described correlation pattern.

Our perspectives on CTAs have improved and we upgraded the strategy last month from underweight to neutral. Yet, we refrain from upgrading to overweight as a result of unstable trend following conditions in asset classes such as fixed income and FX (while trend conditions have improved on commodities and remain strong in equities). On top of that, the very long positioning of CTAs on fixed income is vulnerable to the rise in bond yields, which we expect due to factors such as buoyant economic activity/ central bank normalization and the increased likelihood of tax reform in the U.S.

With regards to the remaining hedge fund strategies, it is worth noting that the broad based uptick in hedge fund performance continues. Global Macro, Event Driven and L/S Equity are all up in the range of 1.2-2.6% month to date.

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