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Many traders took a holiday in December, but market worries over the European debt situation did not take time off. Risk assets fell during the first part of the month but generally recovered during the final portion of the month. The euro similarly fell during the first part of the month, but there was no recovery afterwards. Curiously, the US dollar proved to be a much more effective safe haven than gold, which fell more than 10% on the month. CTAs and arbitrage-oriented managers (Merger Arbitrage, Convertible Arbitrage, and Statistical Arbitrage) were among those able to take advantage of these conditions to end 2011 on a high note.

Managed futures traders were generally able to post positive returns on the month, especially as US Treasury bonds gained during the final week of the year. CTAs favoured long bond, long US dollar, long commodity, and short equity positioning and gained 1.3%, according to the Lyxor Long-Term CTA Index. The Lyxor Short-Term CTA Index declined 1.3% to the end the year with a 3.1% gain.

Merger Arbitrage managers posted modest gains, with the Lyxor Merger Arbitrage Index gaining 0.2% in December. Arbitrage spreads in the U.S. tightened somewhat, but several deals outside the U.S. contributed noticeably to the results. The Lyxor Special Situations Index declined 2.1% on the month to cap a difficult year. Financial stocks rallied somewhat, but these holdings were not sufficient to offset losses in positions in gold, mining stocks, or energy stocks. The Distressed Index gained 0.6%, with post-reorganization equities gaining sharply during the month-end risk rally.

Credit markets experienced limited liquidity and notable volatility, yet spreads generally tightened over the month. Many managers deployed very conservative positioning, with modest net exposure. The Lyxor L/S Credit Index gained 0.5%. The Lyxor Convertible and Volatility Arbitrage Index gained a solid 1.2%, partly on the basis of these improved credit markets.

The Lyxor Global Macro Index was flat on the month. Many commodity oriented funds lost as those markets declined, and managers with precious metal positioning suffered. Long dollar positions gained versus the euro and a number of other currencies. Fixed income specialists were able to monetize some of the volatility and post positive returns. The Lyxor Fixed Income Arbitrage Index gained 0.1% on the month.

Equity market managers ended the year with modest net and gross positions, which were generally much lower than the risk taken at the beginning of 2011. The Lyxor L/S Equity Long Bias Index declined 0.3%; although some managers gained significantly over the month, some suffered more sharply from the decline in Chinese equities. Variable Bias managers generally displayed muted returns, but the Lyxor L/S Equity Variable Bias Index declined 3.0% because of exposure to managers with significant precious metal exposures.

The correlations among stock returns remained at extreme levels, yet there was enough volatility in the market for some of the quantitatively-oriented managers to add value. The Lyxor L/S Equity Statistical Arbitrage Index gained +0.5%. The Lyxor L/S Equity Market Neutral Index declined 0.5%.

www.lyxor.com

BG