(LF) ABSOLUTE RETURN FUND LU0273968288

The Sub - Fund invests mainly in bonds and money market & derivative instruments implementing modern and high-equipped techniques in portfolio management. The fund benchmarks against the weighted average of the basic European Central Bank rate plus 250 basis points, while keeping its volatility at low level, close to 5% on an annual basis.

Global markets began 2026 on a constructive footing, with a strong risk-on tone driven by continued rotation within equities, particularly around the implications of AI for productivity and the outlook for technology and software companies. In fixed income, moderating inflation on both sides of the Atlantic supported bond markets, while credit spreads continued to tighten. Within this environment, the fund delivered strong performance in the first two months of the year, supported by a number of successful single-name equity positions alongside solid contributions from credit exposure. As February progressed, we gradually reduced overall risk, trimming bond exposure and increasing downside protection through put options on the S&P 500. At the same time, we expanded our short position in 5-year German Bund futures, reflecting our view that the rally in the front end of the curve had become overextended. We also initiated a modest long position in the Japanese yen, anticipating a rebound from depressed levels. The escalation of the war in Iran marked a turning point for global markets. Entering this phase with reduced risk and short duration exposure allowed the fund to limit downside effectively. As oil prices surged and the conflict evolved into a broader geopolitical shock, inflation expectations repriced sharply, leading to a sell-off in bonds.

As the quarter progressed and market pricing became increasingly aggressive—particularly in Europe, where up to three rate hikes were being priced—we began to rebuild duration, establishing a meaningful long position in 5-year German Bunds. In parallel, we reduced exposure to the long end of the curve, taking advantage of the pronounced flattening. We also selectively added risk in areas where valuations had become more attractive, including Greek government bonds, Greek bank Tier 1 instruments, and select credit names that had widened. In FX, we increased our long USD exposure, reflecting its expected resilience in a risk-off environment. Toward the end of the quarter, we cautiously added to equities, with a focus on the banking sector, where valuations had adjusted significantly.