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Financial markets continued a number of September’s strong trends into October, although the price trajectories were not quite as extreme. US equities posted solid gains, and some of the USD-related plays experienced very solid returns. For example, commodity indexes gained in the high single digits, the euro gained value, gold gained approximately 2%, and silver gained double digits. Long-dated Treasury yields rose sharply, but short and medium-dated paper was roughly flat on the month. Credit spreads declined; the net result was continued positive gains in the High Yield space. Anticipation of QE2, it almost goes without saying, was the dominant market concern. A less important event appeared to be the U.S. midterm election. Corporate earnings provided no major surprises.

October’s trends generally worked for futures-oriented managers. The Lyxor Global Macro Index gained 3% on the month, and the Lyxor CTA Long-Term Index gained 3.2% (taking the year-to-date return to 10.1%). Still-popular long positions in long-dated bond futures were a performance drag for many managers, but long positions in most other asset classes dominated the performances. The CTA Short-Term Index also posted a positive, albeit much more modest return of 0.7%.

Event-Driven managers typically lagged their macro-oriented peers. The Lyxor Merger Arbitrage Index gained 0.3%. The strategy was particularly impacted by spread widening for a well-known deal in the chemical sector; arbs had been pricing the deal very aggressively in anticipation of further bids. The Special Situations Index gained 1.8% in spite of declines in many financial firm shares. The Lyxor Distressed Index lose 0.5%.

The Lyxor Fixed Income Arbitrage Index lose 0.1% and the L/S Credit Index gained 2.2%, pushing its year-to-date performance to 10.6%. Managers in both strategies were able to benefit from gains in emerging markets debt and currency. The Lyxor Convertible & Volatility Arbitrage Index was up 1.7% in October 2010. The strong demand for yield has exacerbated the impact of modest issuance in the convertibles market; the result has been a noticeable tightening in convert pricing.

Directional equity managers had excellent raw material with which to work, and the L/S Equity Long Bias Index gained 1.7% on the month. The L/S Equity Variable Bias gained 1%.

Less directional equity managers continue to wallow in their struggles. The L/S Equity Market Neutral Index posted a -0.5% decline. The L/S Equity Statistical Arbitrage Index gained 0.6% but is still down -1.4% on the year as managers continue to struggle with the “risk on/risk off” environment.

(press release)

Download full press release and performance table here: www.lyxor.com/news-press.php

BG