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The general trend in risk assets was arguably “up” in January 2011, but the movement was punctuated by several sharp downticks that threw off some hedge fund managers. The first downtick was a mild movement attributed to poor jobless data in the US and a flare-up in European sovereign debt concerns. The second one came early in the U.S. earnings season, and it was triggered when a prominent global bank surprised to the downside due to sharply lower revenue from trading. The final downtick came toward the end of the month on civil unrest in Egypt.

Broad equity indexes weathered these shocks and showed a positive return at the of the month (e.g., the S&P 500 was up 2.4%), but some exposures suffered so much during the downturns that they were little changed on the month (e.g., the S&P 600 small cap index was up 0.2%).

Gains in large cap equities helped power the Lyxor L/S Equity Long-Bias Index to a 1.1% gain; managers have maintained very high net and gross exposures throughout the past several months. The Lyxor L/S Equity Variable Bias Index fell 0.4% and the Statistical Arbitrage Index fell 1.1%; the quick downturns in the market and the return differential among various styles help explain the poor performances. The Market Neutral Index, not exposed to some of the most detrimental factors, gained 0.9%.

Convertible Arbitrage managers gained 1.0% according to the Lyxor index. Seasoned convertibles continue to richen due to simple supply/demand dynamics for equity-linked assets and the seemingly relentless rise in underlying stocks. The Lyxor L/S Credit Index rose 0.6%; credit spreads continued tightening.

Short euro positions and long energy positions proved painful for many futures traders during the month, and the Lyxor Long-Term CTA Index declined 2.0%. Many managers put on more risk at the turn of the year, but it did not turn out as planned. The Lyxor Short-Term CTA Index was flat.

The Lyxor Merger Arbitrage Index gained 1.4% in January 2011, making it the best performing strategy index in the Lyxor suite. The Distressed Index was up 1.0% as post-reorg equities gained.

The Lyxor Special Situations Index edged up 0.5% after peaking mid-month. Long gold positions were a persistent drag on returns, and protective positions on European sovereign debt generally lost as spreads narrowed for the majority of the month. Long financial positions proved painful during earnings season.

The Lyxor Global Macro Index declined 0.6% on the month, with equity- and commodity-oriented managers generally performing worse than that and diversified managers performing better. The index peaked mid-month (reaching positive territory) but slipped as some risk assets lost steam. Some FX-oriented managers suffered from the double whammy of weakening emerging currencies and a simultaneously strengthening euro. The Lyxor Fixed Income Arbitrage Index gained 0.7%...Corporate website: Source
KM