Hedge funds running variable-biased strategies which can adjust their net exposure quickly are best placed to withstand further turmoil, as sustained market volatility continues to roil markets, according to Lyxor Asset Management.
Investors should also favour strategies that are tactical and less biased towards risk factors, the Paris-based investor said.
With risk assets yet to fully stabilise following the dramatic sell-off earlier this month, European long/short equity managers have fared better than their US counterparts lately, in part due to comparatively lower style biases and net exposures.
Alpha generation among long/short managers has generally lagged previous years, but some equity-focused hedge funds have outperformed during the recent selloff, maintaining their net exposure in anticipation of the rupture being short-lived.
Philippe Ferreira, senior strategist at Lyxor, observed how risk factor rotations have driven low beta stocks to outperform lately.
Lyxor is neutral on long/short equity strategies, with a preference for variable-biased funds, and overweight on relative value arbitrage and merger arbitrage, the best performing strategies this year.
Zeroing in on the prevailing risk factors up ahead, Ferriera said in a note that there is little indication of a sustainable rebound of value stocks at this point in the cycle.
He suggested there is still confidence in growth and technology stocks, stemming from a sense that bond yields have limited upside room.
“Low beta stocks make a lot of sense at this stage of the business cycle where US overheating fears may give way to recession fears in the coming months,” he wrote.
“When such views are applied to l/s equity strategies, they suggest a preference for variable biased strategies that can adjust their net exposure down or up quickly.”
Variable-biased hedge funds offer stability amid turmoil on EuroHedge.