Race to the Bottom Fuels CTAs and Global Macro. Net Exposure to currencies vs US dollar, % NAV. Global Macro. Oct-15 Jan % -10% -5% 0% 5%

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Race to the Bottom Fuels CTAs and Global Macro Philippe Ferreira Senior Strategist philippe.ferreira@lyxor.com Anne Mauny Research Analyst anne.mauny@lyxor.

1 Race to the Bottom Fuels CTAs and Global Macro Philippe Ferreira Senior Strategist Anne Mauny Research Analyst Jean-Baptiste Berthon Senior Strategist Lionel Melin Strategist Jeanne Asseraf-Bitton Global Head of Cross Asset Research Central Banks have re-engaged into a race to the bottom over the recent weeks, which has generated support to hedge fund strategies with sizeable FX and fixed income positions. Two weeks ago, the surprise move by the BoJ to introduce "Quantitative and Qualitative Monetary Easing with a Negative Interest Rate" led to a depreciation of the JPY vs USD and a rebound of Japanese equities (though short lived). In its statement, the BoJ said that it will cut the interest rate further into negative territory if judged as necessary. Meanwhile, Janet Yellen will speak on several occasions over the next few days. Although, she is not expected to provide a detailed guidance about the next FOMC decision to be adopted mid- March, markets hope the tone will be dovish. Finally, the European Central Bank is set to adopt additional easing steps at its next monetary policy meeting on March 1. Since the beginning of the year, the main beneficiaries of such renewed central bank activism have been CTAs and Global Macro. According to Lyxor indices, these strategies are the only ones posting positive returns year to date (3.3% and.2% respectively). At the other end of the spectrum, hedge fund strategies with more market directionality such as L/S Equity and Event Driven underperformed (-2. and -2.3% respectively). Our recommendations remain the same: a preference in strategies with a relative value approach (overweight Global Macro and Fixed Income Arbitrage, along with L/S Equity Market Neutral and L/S Equity Variable Bias). On the contrary, we continue to recommend avoiding L/S Equity Long Bias, L/S Credit and Special Situations in Event Driven. Going forward, markets remain concerned about recession risks in the US and the declining marginal impact of central bank actions. Translated into hedge fund allocation, a very defensive investor would favor a 1 allocation to CTAs. Managed Futures will be the only hedge fund strategy delivering positive returns if US equities enter bear market. We do not fall into the group of pessimists. We note that US consumption continued to grow at a robust pace in Q4 last year and real wages continued to move higher into 216. This should ultimately support activity and lead to a rebound in risk assets at a later stage. Xxx Macro managers reduced long USD positions while CTAs reversed the stance on JPY Net Exposure to currencies vs US dollar, % NAV Global Macro CTA GBP EUR JPY JPY EUR CHF CAD AUD AUD CAD CHF Other Oct-15 Jan-16 GBP Other -15% -1-5% 5% As of 26/1/216. Equally Weighted. Source: Lyxor AM THIS DOCUMENT IS FOR THE EXCLUSIVE USE OF INVESTORS ACTING ON THEIR OWN ACCOUNT AND CATEGORISED EITHER AS ELIGIBLE COUNTERPARTIES OR PROFESSIONAL CLIENTS WITHIN THE MEANING OF MARKETS IN FINANCIAL INSTRUMENTS DIRECTIVE 24/39/CE OR QUALIFIED PURCHASERS WITHIN THE MEANING OF RELEVANT U.S. SECURITIES LAW. SEE IMPORTANT DISCLAIMERS AT THE END OF THIS DOCUMENT 1

2 THE WEEK IN 3 CHARTS Hedge Fund Snapshot:Global Macro outperforms early February Lyxor Hedge Fund Index.3%.3% -1. CTA Broad Index.. 3.3% Event Driven Broad Index.2%.2% -2.3% Fixed Income Broad Index -.3% -.3% -1. L/S Equity Broad Index Global Macro Index % S&P % 1 Y US Treasury (Change in bps) Hedge funds started the month on a positive note, with the Lyxor Hedge Fund Index up.3%, outperforming the MSCI World (.2%) by a small margin. All strategies, except Fixed Income, contributed to this good performance. Global Macro funds were mainly supported by short positions on JPY vs USD and long duration positions on US fixed income. The remaining strategies were flat, with the Lyxor Fixed Income Broad Index underperforming. *From 26 January to February 2, 216 The earnings momentum remains negative across the globe 3 months momentum of 12 months forward earnings Earnings forecasts continnue to be revised down Twelve month forward earnings have been revised down over the last three months, both in the US (- 4.2%) and in Europe (-3.3%). Japan is somewhat more resilient, though revisions are also negative (2.). In Europe, the earnings of European banks have been particularly revised down over the last 3 months (- 6.7%) while momentum has turned positive for the consumer discretionary sector (+5%). Meanwhile, in the aftermath of collapsing oil prices, energy suffered the highest downward EPS revision both in the US (-43%) and in Europe (-19%). Source: Datastream, I/B/E/S, Lyxor AM Hedge funds remain cautious on equities Median equity beta on the Lyxor Platform by strategy Ev ent Driv en L/S Equity Global Macro Multi-Strategy CTAs -1 Jul-15 Aug-15 Sep-15 Oct-15 Nov -15 Dec-15 Jan-16 Hedge funds mildly exposed to equities Source: Lyxor AM. Hedge funds maintain a cautious stance on equities. The median equity beta on the Lyxor platform reached new lows (1), a level last seen in August 212. Across hedge fund strategies, CTAs have cut their net exposure to equities, turning short. Meanwhile, L/S equity funds remained cautious, a strategy that paid off at the end of 215. Asian L/S equity managers in particular continued to decrease their exposure to equities. By contrast, Event Driven managers maintained their equity holdings, as managers do not see any change in fundamentals. Instead, they are keeping their long term views. 2

3 CTAs CTA Broad Index.. 3.3% CTA Long Term.2%.2% 3.6% CTA Short Term -1.4% -1.4% -1.5% *From 26 January to February 2, 216 Short exposure to equities in the US and Europe Net Exposure to Equities, % NAV Fixed Income saved the week CTA funds were slightly up last week, with long-term systems outperforming short-term ones. The fixed income cluster accounted for most of the gains. The downward trend followed by rates on both sides of the Atlantic enabled long positioned funds to extract alpha, especially on their exposure to US, UK and German bonds. Funds benefitted also from the drop of Japan s bond yields after the central bank adopted a negative interest-rate policy US Europe Part of the performance was dragged down by the equity space. The losses were mainly driven by the short exposures to Japanese equities, as stocks rallied after the BOJ unexpectedly cut rates. One fund posted significant losses on its long exposure to the European stock market Dec 16-Dec 31-Dec 15-Jan 3-Jan The FX bucket was down mainly on the back of the long positions to the Japanese Yen, as the currency depreciated versus USD. Short bias on the EUR vs USD also penalized some funds, as the common currency appreciated last week. As of 26/1/216. Equally weighted. Source: Bloomberg, Lyxor AM GLOBAL MACRO Global Macro Index % Macro Managers have divergent views on Fixed Income: they are long in US and short in Europe Net Exposure to Fixed Income, % NAV US Europe *From 26 January to February 2, Oct-15 Nov -15 Dec-15 Jan Short JPY helped Global Macro funds posted a positive performance over the last week though this was led by some large players. The fixed income cluster was the main driver of returns. Long bias on US and Swedish bonds were highly profitable, as interest rates significantly decreased. However, losses on short duration erased part of the gains, as most funds were hit by their short positioning on the front end of the yield curve in the UK and the US. Long exposure to Japanese equities proved highly rewarding to some managers, as the BOJ s surprise dovish move helped lift Japanese stocks. However, long positioning on European stocks resulted in some give-back of the profits. In the FX bucket, several managers generated alpha on their short exposure to the JPY vs USD, as the Yen dropped. As of 26/1/216. Equally weighted. Source: Bloomberg, Lyxor AM 3

4 L/S EQUITY L/S Equity Broad Index Long Bias % Market Neutral -1.6% -1.6% -1. Variable Bias.9%.9% -1. *From 26 January to February 2, 216 Long positions on consumer sectors were rewarding Net Exposure to sectors, % NAV vs MSCI sector index returns 6% 4% 2% -2% -4% -6% -8% Energy Weekly Perf ormance Utilities Basic Materials Technology Industrials Consumer cy clicals Financials Communications Consumer non-cy clicals Av erage Net Exposure -1-2% 2% 4% 6% 8% 1 12% Variable Bias Outperforms After a tough start, last week was mixed in terms of performance with the Topix rallying after the surprise policy easing from the Bank of Japan. The Lyxor Equity Broad index was up. last week, with a wide dispersion between the winners and the laggards. All Asian L/S funds posted gains over the period, with Global EM funds and Asia Pacific strategies leading the way. A quantitative Asia Market Neutral fund which suffered from the volatility in China last year is regaining momentum and is now up +85bps YTD. The S&P halted its slump and finished last week in flat territory. Sentiment was initially boosted by good consumer confidence data and strong Q4 corporate earnings but the risk appetite waned as a fall in crude oil prices caused markets to tumble. US L/S Funds resisted fairly well to this volatile environment and Variable Bias managers continued to outperform. In Europe, stocks continued to follow the trend in oil prices and investors fled to Utilities and Consumer Staples. This also helped Variable Bias European funds to outperform. Performance between 26/1 and 2/2/216. Equally weighted. Source: MSCI, Lyxor AM EVENT DRIVEN Event Driven Broad Index.2%.2% -2.3% Merger Arbitrage.3%.3% -.6% Special Situations % *From 26 January to February 2, 216 BG Group vs. Royal Dutch Shell deal spread continued to tighten Gross Spread, GBP Deal Spreads Tighten The Event Driven platform was slightly up last week, with Merger Arbitrage outperforming the Special Situations sub category. Returns across single managers were mixed and ranged between -2.5% and +1.5%. Merger Arbitrage gains were widespread and led by several positive developments in core positions. The BG Group / Royal Dutch Shell deal spread continued to tighten and is expected to close in the coming days. Broadcom vs. Avago transaction concluded successfully on February 2. Sandisk vs. Western Digital saw its spread tighten from its widest level after analysts upgraded the target from neutral to buy Jan 8-Jan 15-Jan 22-Jan 29-Jan As for Special Situations managers, gains were led by equity investments in communication, technology and basic materials. They were nonetheless offset by losses in healthcare and consumer sectors. Top contributors include Dow Chemical, Alphabet Inc and Time Warner while top detractors include Allergan, Teva, and Walgreens Boots. As of 2/2/216. Source: Bloomberg, Lyxor AM 4

5 L/S CREDIT ARBITRAGE Fixed Income Broad Index -.3% -.3% -1. L/S Credit Arbitrage.. -.8% European credit market outperformed the US over the week Performance of HY and IG in Europe and US (total return).6%.7% *From 26 January to February 2, 216.4% Mixed Results In the recent risk-off environment, credit markets proved more resilient than equities. In Europe, HY spreads tightened significantly last week (-36bps) but remained unchanged on IG. European credit outperformed the US on both segments, as US spreads kept increasing (+15bps for HY and +7 bps for IG). Credit arbitragers posted nonetheless mixed results last week. Asian funds outperformed, benefiting from the rebound in the real estate sector. European funds in our sample ended the week flattish, posting some gains on financial and communication sectors.. EU Credit IG Credit HY US As of 26/1/216. Source: Merrill Lynch, Lyxor AM 5

6 METHODOLOGY Breakdown of AUM by strategy Multi- Strategy CB, L/S Credit, Fixed Income Arbitrage CTAs - 7 funds in the platform L/S Equity Global Macro Ev ent Driv en & Risk Arb. - USD 8.4 billion of assets under management (as of December 31, 215) - Replicating approximately USD 25 billion of AUM Lyxor Hedge Fund Indices Based on the complete range of funds available on the Lyxor Managed Account Platform, a universe of funds eligible for inclusion in the indices is defined on a monthly basis taking into account the following elements: - Investability Threshold To be included in any index, the managed account must have at least $3 million of AUM. - Capacity Constraints All index components must possess adequate capacity to allow for smooth index replication in the context of a regular increase in investments. - Index Construction For each index, the relative weightings of the component funds are computed on an asset-weighted basis as adjusted by the relevant capacity factors. - Each Lyxor Hedge Fund Index is reviewed and rebalanced on a monthly basis. - The Index construction methodology has been designed to mitigate well-known measurement biases. Inclusions and exclusions of new Hedge Funds do not impact the historical index track record. 6

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Killer Quarter Has Hedge Funds down 2% 80 Mar-15 May -15 Jul-15 Sep-15 Nov -15 Jan-16 Mar-16

Killer Quarter Has Hedge Funds down 2% Philippe Ferreira Senior Strategist philippe.ferreira@lyxor.com Anne Mauny Research Analyst anne.mauny@lyxor.com Jean-Baptiste Berthon Senior Strategist jean-baptiste.berthon@lyxor.com