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April was a contrasted month for risky assets. The month had started on a solid footing, underpinned by a favourable bottom up earnings picture and solid readings in most economic indicators. End of the month, however, fundamental issues again came to the forefront. Investors realised that the recession had a cost, and that this cost was palatable in the deterioration of sovereign accounts. Spreads on Greek and Southern European Government bonds surged, while the German Bund benefited from flight to safety. The euro dropped, as confidence in Europe’s ability to manage the crisis waned. This quite unstable environment was detrimental to equity related strategies, and they gave back part of the gains recorded in the first three weeks of the month.

However, some managers found strong support in April markets. Typically, Fixed Income managers posted this month’s strongest returns. The index was up by 3%. Coupled with a helpful flight to quality effect, spread and curve arbitrage were a strong source of performance. L/S credit mangers gave back some gains as the sovereign spread widening filtered through to credit indices. Nevertheless, the strategy rose by 1.9%. As for Convertible Bond managers (+1.8%), they profited from rising volatility and negative equity deltas.

The “sovereign disruption” also offered opportunities in foreign exchange markets. The Global macro index rose 0.8%, but dispersion of returns was high. Managers with limited equity positions and high conviction short euro (typically against the greenback and emerging currencies) realised attractive gains. These same positions, coupled with long interest rate futures exposures were, on average, helpful for CTAs. Long term models rose by 1.3%, while shorter time frame systems recorded a more limited 0.3% gain.

Even though they suffered from the end of month turbulence, Special Situations remain a steady and strong earner, up by 1.4%. Some funds managed to smooth performance thanks to their macro hedging related to sovereign risk. Merger arbitrage offered a more limited 0.9% performance, due to some volatility in the pharmaceutical sector. The Distressed index gained also +0.9%.

L/S equity managers retained their defensive positioning. Long bias managers display a prudent net long 48% exposure. As for variable bias managers, they cut net exposure to 29% by the end of the month. Monthly performance for both strategies was of 0.2% and -0.2%, respectively. Statistical Arbitrage had some rough trading sessions, down by 1%.

www.lyxor.com

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