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Lyxor Strategy Q1_2012 Final

Lyxor Strategy Q1_2012 Final

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Quarterly Strategy-FirstQuarter2012 -
TOWARDS NORMALIZATION
Business CycleAsset ClassesAlternative Strategies
Reflation is slowly gaining The ECB’s new policyL/S Credit a key convictionUS policy mix remainssupportive in 2012 Deleveraging providing risksand opportunitiesAdding risk selectivelyCorrelations still elevated, butdeclining quickly for nowNo straightforward solutionto the Euro crisisNot all havens seemsafe anymore
Lionel ErdelyJean-Marc Stenge
A global slowdown ininflationOpportunities from pricingdislocations preferredCorporate health notreflected in US High Yield
Head of Alternative InvestmentsLyxor Asset ManagementDeputy Head Alternative InvestmentsLyxor Asset Management
Scott Mixon
Strategy -Fund ManagementLyxor Asset Management
Jeanne Asseraf-Bitton
Strategy -Fund ManagementLyxor Asset Management
Florence Barjou
Strategy -Fund ManagementLyxor Asset Management
 – Alternative Investments Strategy
 
 
Lyxor AM Strategy views – 1
st
quarter 2012 
Completed February 6, 2012Any opinions contained in this document are those of the authors and are not given or endorsed by the company. This document does not constitute an offer or aninvitation to invest or purchase any financial instrument. The products herein mentioned are subject to various legal or regulatory restrictions. Lyxor Asset Managementand/or the authors of such opinions assume no fiduciary responsibility or liability for any consequences financial or otherwise arising from the subscription or acquisition of these products.
 
INVESTMENT STRATEGY
INVESTMENT STRATEGY 1
st
quarter 2012
AlternativeInvestments
Lionel Erdely
 Head of AlternativeInvestments+1-212-205-4010lionel.erdely@lyxor.com
Jean-Marc Stenger 
 Deputy Head of Alternative Investments+33-1-42-13-70-08 jean-marc.stenger@lyxor.com
Jeanne Asseraf-Bitton
Strategy – FundManagement+33-1-58-98-10-98 jeanne.asseraf-bitton@lyxor.com
Florence Barjou
Strategy – FundManagement+33-1-42-13-71-82florence.barjou@lyxor.com
Scott Mixon
Strategy – FundManagement+1-212-205-4012scott.mixon@lyxor.com
STRATEGY VIEWS
Q1 2012
Business Cycle:
Our central scenario remains that of a structural debt deflationary backdrop.Deleveraging is ongoing, and growth rates should remain below potential. Nevertheless,reflationary forces have recently gained ground, and progress has been made on the path tonormalization. The improvement is striking in the US, where credit is again expanding. Withelections looming in November, we expect fiscal tightening to be delayed until 2013. Economicmomentum should thus remain supportive in 2012. Housing could offer a welcome positivesurprise. In Europe, we do not expect any straightforward solution to the sovereign debt crisis.Many hurdles remain, and downbeat activity is one of them. Nevertheless, now that the ECB isde facto monetizing debt behind the scene, systemic risk has declined. More globally, we expecta synchronized slowdown in inflation. In developed countries, this will mean higher real rates. Indeveloping ones, it will allow dovish monetary policies.
Asset Classes:
Markets are likely to remain caught between the structural debt-deflationarybackdrop in developed countries, central banks’ massive reflationary efforts and therecessionary impact of fiscal consolidation. We believe reflation should gradually gain ground.The major downside risk lies in the Eurozone where banks’ deleveraging could worsen theongoing recession. However, the ECB’s backdoor quantitative easing has capped systemic risk,triggering a turnaround in market sentiment. The sharp relief rally has corrected extremeundervaluation but risk premiums remain attractive. We are shifting to a more constructive viewand are selectively adding exposure. The road towards normalization should be detrimental toovervalued safe havens such as high grade sovereign bonds. We think U.S. corporate health isnot yet reflected in credit markets that offer an attractive risk reward profile. We favor U.S. equityamid improving fundamentals. Yet, we are less cautious on Europe as the deep valuation gapwith the U.S. should start to close. In particular, a better policy mix should support UK equities.Positive long term growth prospects, further monetary easing and undemanding valuation keepus positive on Emerging markets.
Alternative Strategies:
 
We continue to see significant opportunities for managers in the L/SCredit space and for managers on the lookout for valuation mispricings and hard catalystopportunities. Correlation and volatility are at lower levels than they were at the highs of 2011,which is currently benefitting hedge fund managers. Thoughtful managers recognize this goodtone to the markets might not last forever – markets rarely move in a straight line - and managetheir portfolios accordingly. We downgrade L/S Equity Quant managers to a Slight Underweightranking.
Note: Black signals an unchanged view,Blue signals an upgrade,Red signals a downgrade.
UnderweightOverweight
EURJapan EquitiesCASHEM Equities
US HY Credit
German BondsTIPSCommoditiesUS IG Credit
 Yen
US BondsPrecious metals
Eurozone Equities
UK EquitiesUS EquitiesUSDEU Credit
UnderweightOverweight
Distressed CTAs Short Term Equity Neutral FI ArbCTAs Long Term L/S Equity Variable Global MacroStat Arb Merger ArbCB Arb L/S CreditL/S Equity Long Bias Special Sits
Quant Arb
 
2
 
INVESTMENT STRATEGY 1
st
quarter 2012
ALTERNATIVE INVESTMENTS
TABLE OF CONTENTS
BUSINESS CYCLE ............................................................................................................................................ 3
 
REFLATION SLOWLY GAINS GROUND ................................................................................................................................. 3
 
 
Politics & policy dominate economics ........................................................................................................................... 3
 
 
Europe. A recession followed by chronic weakness ..................................................................................................... 4
 
 
No straightforward solution to the Euro Crisis, but receding systemic risk ................................................................... 4
 
 
Queuing up at the hairdresser. Is Portugal the next candidate for a haircut? ............................................................... 5
 
 
The credit crunch is unfolding in Europe ....................................................................................................................... 6
 
 
Europe. A supportive currency, at last? ........................................................................................................................ 6
 
 
US. Reflation progressively gains ground ..................................................................................................................... 7
 
 
US. No recession in 2012 ............................................................................................................................................. 7
 
 
Will housing be 2012’s positive surprise? ..................................................................................................................... 8
 
 
Emerging markets: supportive policy yet has to kick in ................................................................................................ 9
 
 
Inflation re-coupling across the globe ......................................................................................................................... 10
 
ASSET CLASSES ........................................................................................................................................... 11
 
TOWARDS NORMALIZATION ............................................................................................................................................... 11
 
 
Coming out from 2011, rescued by central banks ...................................................................................................... 11
 
 
How sustainable is the liquidity driven rally? ............................................................................................................... 12
 
 
All in all, we are becoming more constructive as the balance of risk is shifting .......................................................... 15
 
 
Not all havens seem safe anymore ............................................................................................................................. 16
 
 
Gold, a bet on monetary reflation ................................................................................................................................ 17
 
 
US high yield, a top conviction .................................................................................................................................... 17
 
 
Strategic and Quant views also agree on a neutral stance on Equity ......................................................................... 19
 
 
More upside left in U.S. Equity .................................................................................................................................... 19
 
 
A cautious upgrade on European markets .................................................................................................................. 20
 
 
Emerging equity: positive drivers ................................................................................................................................ 21
 
 
Oil and industrial commodities. Waiting for a short term catalyst ............................................................................... 21
 
 
Currencies under central banks’ influence .................................................................................................................. 22
 
ALTERNATIVE STRATEGIES ........................................................................................................................ 23
 
THE RETURN OF ALPHA? .................................................................................................................................................... 23
 
 
Correlation: High, but moving in the right direction for now ........................................................................................ 23
 
 
Convertible & Volatility Arbitrage ................................................................................................................................ 25
 
 
CTAs, Global Macro, and Fixed Income Arb .............................................................................................................. 27
 
 
Event Driven ............................................................................................................................................................... 29
 
 
L/S Credit .................................................................................................................................................................... 31
 
 
L/S Equity .................................................................................................................................................................... 33
 
DISCLAIMER ................................................................................................................................................... 35
 

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