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Equity markets delivered solid gains in July 2010, as major Western indexes posted gains in the 6-7% range. Investors appeared pleased with the European stress test results and strong U.S corporate earnings. This provided a tailwind for L/S Equity managers, especially if they were exposed to high-performing sectors such as technology and industrials. Japanese exporters and markets were, however, weighed down by the strong yen.

Many equity managers have retained a relatively low net exposure to markets, however, and a significant portion of their gains is due to judicious stock selection. The Lyxor L/S Equity Long Bias Index gained 2.2% on the month, while the Variable Bias Index gained just 0.3%. Structurally neutral managers continue to struggle with record-high correlations (and correspondingly record low dispersion) among single stock returns. The Lyxor L/S Equity Market Neutral Index gained 0.2% while the Statistical Arbitrage Index was flat.

Many CTA and Global Macro managers lost ground in July 2010. The Lyxor CTA Long-Term Index declined -1.4% on the month, and the Short-Term Index fell -1.0%. The Lyxor Global Macro Index declined -0.4%.

The popular short euro positioning had been a winner for much of the year, but the EUR gained approximately 6% versus the USD over the month, generating losses for many. The rise in equity markets also detracted from some CTA performances, as many medium-term CTAs had previously cut long equity exposures and had, in many cases, moved to net short exposures. Bond exposures did not generally provide gains, either. Although the USD lost value versus the euro, it gained versus gold. Managers with long gold exposures therefore suffered as deflation fears apparently trumped inflation fears.

Within the Event Driven space, Merger Arbitrage managers continued their gains (+1.5% for the Lyxor Index on the month, and +2.9% on the year-to-date). General spread tightening was aided by increased offer prices for some deals. Many Special Situations managers have substantial allocations to financial names, and the strong performance by this sector gave them a boost (the Lyxor Index gained 1.6%). Distressed managers also benefited, with the Lyxor Index gaining 0.6%.

The relief rally in equity markets also extended to credit markets. Broad indexes of credit spreads fell sharply, benefiting many managers. The Lyxor L/S Credit Index gained 1.4% despite generally modest volumes and liquidity. High yield and emerging market debt (e.g., Argentinean paper) showed solid gains. The Lyxor Convertible Arbitrage Index gained 1.6% due to the same factors that aided general L/S Credit managers. Convertible issuance remains low, although one large deal did occur late in the month. The Lyxor Fixed Income Index posted gains of 2.9% in this environment... Corporate website: Source
PD