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Long/Short Equity
Positive return outlook with medium risk outlook

• We are anticipating that there is a high likelihood of slow economic growth in the major developed countries. This level of recovery is not sufficiently strong to bring forward monetary tightening but nor is it so weak that it will prevent reasonable earnings growth. Furthermore, loose monetary policy is allowing companies to borrow cheaply. Faster growth is clearly anticipated in Emerging Markets. Equity market valuations are reasonable, inefficiency is high and there has been paralysing investor risk aversion.
• Asian and Emerging Markets continue to offer the highest secular growth opportunities while the US economy remains at the head of the recovery amongst the other developed countries. We continue to favour Long/Short Equity managers focusing on the Asian and Emerging Markets.
• While QE2 has already had an effect on the US dollar and the government bond market, it is also likely to boost the equity markets and increase flows into Emerging Markets as well.
• We continue to favour managers with a variable bias within the strategy because of the preference for managers that are nimble and flexible in market conditions that are likely to continue to change. Able trading-orientated managers should also continue to perform well.

Credit
Positive return outlook with medium risk outlook

• The low rate environment has continued to encourage investors to buy yield which has resulted in further spread tightening in credit to more normalised levels. The future direction from here is less certain.
• Structural market inefficiencies brought about by the stratified traditional investor base continues to create opportunities through mispricings. While bond and loan prices have generally risen, there remain areas of undervaluation for long positions.
• Differentiation in credit quality, continued valuation anomalies and potential for further stress continue to create a plentiful opportunity set, albeit within a more difficult trading environment of late. We continue to favour managers in this strategy that have a long short bias.

Macro
Positive return outlook with high risk outlook

• Macro managers continue to have the largest exposures to themes in the fixed income markets. There has certainly been much movement to capture in these markets during the year. However, more recently, exposure levels have been moved a little more in favour of foreign exchange, equity and to a lesser extent commodity markets and fixed income exposure is generally more varied.
• We note that as some Emerging Market currencies are reaching multi-year highs, currency volatility remains higher than average in general and will thus provide opportunities for traders.
• The background to markets should continue to provide a constructive opportunity set for Macro managers and the return outlook therefore continues to be positive.

Event Driven
Neutral return outlook with medium risk outlook

• We believe that M&A activity levels troughed in 2009 and are in the process of recovering. The third quarter provided further evidence of this as volume levels activity continued to improve with the inclusion of a number of large headline deals. However, the increase in the deal count was more marginal over the quarter.
• While we persist in our monitoring of the developments across the distressed and merger arbitrage areas, we continue to favour those Multi-Strategy managers that can be selective across a wide range of opportunities in equity and credit related Event Driven strategies.

Fixed Income Relative Value
Neutral return outlook with medium risk outlook

• Yield curves have continued to flatten and further movements are expected to result from changes to views on inflation, expectations of monetary policy, QE policies and other macroeconomic developments. Yield curve, steepening and flattening trading opportunities vary across markets and curve segments. These curve movements are likely to continue to be meaningful until more of a consensus emerges in the debate over whether inflation or deflation is the greater concern.
• A relatively strong opportunity set continues to be provided for trading-orientated managers in the Fixed Income Relative Value strategy and therefore the best performing managers could produce double digit returns.

Trend Followers/CTAs
Neutral return outlook with high risk outlook

• CTA managers performed well during the third quarter despite choppy conditions and trend reversals in the commodity and equity markets. Fixed income was the main contributor to performance but the other asset class exposures also contributed positively due to good returns from currencies, equities and commodities in September.
• The level of risk utilised by managers in terms of the average margin to equity rose at the end of the quarter which could also reflect a better opportunity set for the strategy.

Corporate website: www.iam.co.uk

- FG