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Risky assets got hammered during the month of May and so were most alternative investment strategies. The month started on the downward trend registered the month before. Sovereign fears marked a pause for just three days in the aftermath of the decision taken by European heads of government and of State on May 9th to set up a coordinated rescue package.

The subsequent slide in asset prices was all the more impressive. US Treasuries, US Dollar and the German Bund benefited from flight to safety whereas sovereign risk contagion could not be contained to peripheral European countries.

This unstable environment was detrimental to most equity and credit-related managers, many of them erasing a big chunk of the gains made so far this year.

Yet, some managers were able to monetize the challenging environment. In May 2010, those were typically to be found among the CTA and Global Macro strategies. In particular, the sovereign risk theme offered opportunities in the forex and fixed income markets. Dispersion among systems and managers was high as trading in commodities, Metals and Energy in particular, proved difficult and generated some losses in portfolios. The Short term CTA index was up 1.8% in May while the long term CTA index and the Global Macro index lost -1.8% and -1.1% respectively.

Among L/S equity strategies, managers having a long bias were most hit. The index was down -4.0%. Variable bias managers (the index lost -1.4% during the month) and market neutral managers (the index was flat), mitigated the losses in that segment. Statistical arbitrage managers registered a flat performance overall (the index won 10bp in May).

In the Event Driven segment, Distressed, Merger Arb and Special Situations managers suffered from the market turbulences. The merger arbitrage index, offering more limited net exposure to risky assets, was down -2.2%. Special situations managers were hit both through their long credit book and post-reorganization equity exposures (the index was down -4.3% during the month). Managers with a significant exposure to Financials suffered most.

Fearing European contagion, Asian slowdown and financial reforms, investors strongly de-risked their portfolios which naturally led to wider credit spreads. Both Convertible Arbitrage (the index lost -3.8% in May) and L/S Credit Arbitrage strategies (the index gave back -3.2% during the month) were hit as spreads widened in Investment Grade and High Yield segments. Convertibles sharply cheapened. It was difficult for Vol players to monetize that environment as the volatility of the volatility experienced new spikes.

Corporate website: www.lyxor.com

- FG