Natixis’ report on Hedge Fund Trends notes that the only strartegies that saw losses in the last quarter were CTAs and shortsellers. The best performing strategy once again was returned by long/short hedge funds, which were up +3.5% in Q3.

Natixis Hedge Fund Strategies

The best paying bets

The report notes that the major trend reversal that occurred in the third quarter was the emergence of eurozone to the forefront as it shook off the effects of recession, as Eurostoxx rose 11.3% in Q3. The other themes that Natixis noted in the last quarter were the rebound in volatility and the sell-off in emerging markets.

Rebound in European markets

Hedge funds increased exposure to small caps and growth stocks

Natixis finds that hedge funds who increased exposure to small caps and growth stocks did well in Q3, moreover managers who had bought into the European stocks were also paid off handsomely.

As we have reported several times, August proved to be the toughest month for hedge funds irrespective of their strategy. The anticipation of the Fed’s decision to taper asset purchases caused volatility to spike in all major markets across both bonds and equities. JPM Prime Brokerage noted that its equity book ended August on a particularly bearish note and was net shorted. The general consensus among investors and analysts was that the Fed will announce a reduction in its monthly dose of QE; this caused them to position themselves accordingly and volatility rose across all assets.

Volatility run in Q3

Arbitrage did well despite the volatility run

In fixed income arbitrage strategies, managers increased exposure to high yield credit to offset the effects of rising interest rates, while forex strategy was hurt across the board due to long USD bias against the euro. The rise in the euro almost caught all money managers off guard and most investors have failed to trade it to their benefit.

Natixis recommends an overweighting of arbitrage strategies for the rest of the year as well. The report expects significant swings in yield and volatility in fixed income which are expected to move in parallel with economic news in the U.S. Natixis further concludes that equity indices are at their highest and long bias is therefore preferred. Style/geographical arbitrage can pay well as correlation across assets has subsided. Natixis is neutral on emerging markets.