Lyxor putting faith in the ongoing strength of beta

The strong conviction at Lyxor Asset Management in Paris is that beta always triumphs over alpha. “Getting the asset allocation correct is more important than fund selection,” says Lyxor’s senior strategist Florence Barjou.

“You are always better off with a not so good manager in an asset class doing well, than with a great manager in a poor asset class. Last year for instance, the worst CTA [commodities trading adviser] would have been better than most credit arbitrage managers.”

The asset class call was simple in 2008, with bonds seen as better than equities, so fixed income, along with trend following CTA managers was emphasised, while equities and credit arbitrage were underweighted.

But the normalisation of markets this year means special situations managers are favoured at the expense of the CTA allocation, with markets showing a much lower systemic risk, having moved on from fears about the “end of the world.” The prognosis for equity markets has changed, partly because excess cash needs to be put to work, believes Mr Barjou.

“There is a lot of cash on the sidelines. People are getting nervous as cash does not bring them anything any more. They have already missed out on an equity rally and there is pressure on them now to bring rewards to their portfolio.”

She talks about a “wall of money”, which investors want to re-allocate and re-deploy and is driving up the prices of all asset classes, including equities, bonds and commodities. “People are putting money back into the capital markets, but there is a diversification risk,” warns Ms Barjou.

“Our quant tools show the correlation among asset classes is again at a historical high point, just like 2003.”

This is a time for private investors to be extra careful, she believes, because they may be holding a very broadly diversified portfolio, without having identified any clear direction in the markets. This is why Lyxor believes in diversifying through hedge funds. “Quite a lot of people are simply not aware that they have such a high correlation risk within their portfolios,” she adds.