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>> April did not bring much good news to feed upon. The sentiment boost brought by the ECB’s LTRO fizzled, and Euro related fears resurfaced during the month. Mixed Italian and Spanish auctions at the start of the month and political uncertainty around elections in France, reignited sovereign risks. Macro data was also disappointing across the Atlantic. A few days after Fed Chairman Ben Bernanke underscored that the US labour market was still “far from normal”, the nonfarm payrolls report showed a far below expectations 120K number (205K expected). The economic surprise index, which had been trending down since the start of the year entered negative territory at the end of the month.

Hedge funds, especially credit-oriented ones, proved to be resilient to the equity sell-off in April. The Lyxor L/S Credit Index continued its string of gains by posting a +0.4% performance; the Index has gained each month since December 2011 and is up 4.4% on the year. Managers have, in a number of cases, let positions roll off as target prices were hit or special situations (e.g., tender offers) paid off; risks were therefore reduced as spreads tightened during the first quarter. Some of the bestperforming managers were short European positions before the recent troubles.

Strong dispersion among hedge fund returns continues. CTA managers, whether those focused on medium- and long-term trends, or those focused on shorter-term trends, displayed considerable dispersion within peer groups. The Lyxor Long- Term CTA Index gained 1.0%, with approximately a 10 percentage point difference between the top and bottom performers. One significant tailwind for outperforming managers was the long position in US Treasuries, which rallied as the yield declined roughly 20 basis points. The Short-Term CTA Index declined 0.5%.

Event Driven strategies also exhibited substantial dispersion among managers. The Merger Arbitrage Index declined 0.4%. US-oriented managers were conservatively positioned and treaded water; European-oriented managers suffered as spreads in that region widened disproportionately. The Special Situations Index declined 1%, with some of the credit-oriented managers holding their own, some European managers declining somewhat, and managers with significant precious metals exposures declining far more sharply.

>> With concerns over the Eurozone still high, managers generally adopted a more cautious stance: trading solely on fundamentals is not back yet. “Investors too are seeking greater stability in their allocations without giving up too much return”, says Florence Barjou, Senior Portfolio Manager and Strategist at Lyxor AM.

From: Lyxor's FLASH - AII Barometer, May 2012.

Performance table: www.lyxorhedgeindices.com

BG