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Recession fears, whether driven by downbeat macroeconomic data or by concerns over contagion related to sovereign debt in Europe, dominated markets in August. Equity markets trended sharply downward during the first part of the month, fluctuated up and down for a week or so, and then partially recovered during the last week of the month. Other risky assets, such as industrial commodities, followed a similar path. Safe haven assets, e.g., gold, the Swiss franc, and U.S. Treasury bonds, gained decisively. Volatility remained predictably high.

Trend-following CTAs, on average, exhibited muted returns in this back-and-forth environment with the Lyxor Long-Term CTA Index down just 0.4% on the month. Recent trends have led many to be long bonds and short equities, which was attractive positioning for much of the month. However, the volatility in the markets led to substantial dispersion of returns across managers. The Lyxor Short-Term CTA Index gained a solid 2.2% over the month, with managers in the space able to take advantage of the sharp market declines at the beginning of the month.

Equity-oriented managers persistently reduced net exposures in recent weeks, and this pro-activity led them to outperform the equity indices by a wide margin. While the S&P 500 declined 5.7% and the EuroStoxx 50 declined nearly 14%, the Lyxor L/S Equity Variable Bias Index declined 2.9% and the L/S Equity Long Bias Index fell 4.2%. Managers who are structurally more immunized to market moves declined less, with the L/S Equity Market Neutral Index down 1.1% and the Statistical Arbitrage Index down 1.6%.

Many Special Situations managers had taken risk off their books in recent weeks, but remaining exposures in basic materials, energy, and financials proved painful during the sell-off. The more defensively positioned managers declined a couple of percentage points, but managers with less liquid or more bullish positioning declined much more sharply. The Lyxor Special Situations Index fell 6.5%. The Lyxor Distressed Index declined 0.9% (up 1.6% on the year).

The Lyxor Merger Arbitrage Index declined 2.1% as spreads widened dramatically during the market sell-off. The stormy market environment has led to some deals being called off, but a number of managers view the widening as an attractive opportunity.

Hedge fund managers plying their trade in the credit space experienced a challenging month, as diminished trading liquidity remained a concern. The Lyxor Convertible Arbitrage Index declined 1.7%, as the bonds moved from slightly rich (versus theoretical pricing) to slightly cheap amidst the “risk-off” trading. Leverage utilization remains very low in the strategy. The Lyxor L/S Credit Index declined 3.0%.

Global Macro managers leaning toward long positions in Treasuries and gold distinguished themselves from their more bullish peers in August. The Lyxor Global Macro Index declined 1.2%. Rates-oriented managers were punished if they were short duration, but some of the managers were able to monetize the volatility. The Lyxor Fixed Income Arbitrage Index gained 0.3% on the month.

(press release)

www.lyxor.com

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