Other than stating the obvious about the success of event driven hedge funds and losses of EM focused strategies, the latest quarterly report from Natixis also points out the relative gains of an arbitrage strategy. The rise in profits was predicted by other analysts as well since cross-asset correlation has been falling over the last few months. The lower correlation between equity market and treasury indices combined with lower volatility put arbitrage strategies in a comfortable position in Q1.

Correlation S&P500 vs Eqity Makret Neutral funds arbitrage

Convertible arbitrage wins as bond investors look for equity exposure

According to Natixis, in the lead was Convertible Arbitrage which returned 2.5% in the first quarter, where the best were perfectly hedged with minimal equity exposure. This was followed by fixed income arbitrage strategies which returned 2.1%, as exposure to high yield bonds paid off.

Performance of hedge fund strategies in Q1 2014

Overall, long-bias equity strategies were the clear winners as directional and trend following strategies suffered. The report also finds that those who focused on style bets and scaled down their positions in Japan’s stock market were winners among long equity funds. Another factor that contributed to performance was focus on European small-caps as investors focused on value instead of growth.

Hedge funds Arbitrage

Hedge funds Arbitrage 2

M&A volume directly affects performance of event-driven hedge funds

Several hedge fund managers have noted the rise in M&A volume in their monthly and quarterly letters, and Natixis also pointed it as the main driver for event driven and merger arbitrage strategies. The chart below notes that event-driven funds returned in tandem with the volume of merger and acquisitions happening in the market.

M&A activity vs Event driven hedge funds

On the other end, the worst performers were the emerging market funds. Natixis found that managers who cut exposure to emerging Europe and emerging markets in general were able to minimize their losses.

Arbitrage ranking

Arbitrage risk adjustedThe report concluded that arbitrage and long-bias should be preferred in the coming quarters of 2014 in order to achieve better risk-adjusted returns. Convertible arbitrage in particular was favored by Natixis, as demand for convertible bonds remains high and they provide risk-averse exposure to equity. The report was pessimistic about commodities as demand is likely to remain low in emerging markets through the end of the year.