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Credit strategies dominate Lyxor hedge fund indices

Thursday, November 08, 2012

Stefan Keller
Opalesque Industry Update - Nine Lyxor Strategy Indices out of 14 ended the month in positive territory, led by the Lyxor Long/Short Credit Arbitrage Index (+1.7%), the Convertible Arbitrage Index (+0.5%), and the Distressed Index (+0.6%). The Lyxor Hedge Fund Index declined 0.6% in October (+1.6% in 2012 to date). Earnings season dominated news flow during the month of October. Earnings, as usual, generally beat expectations, but revenues and forward guidance disappointed investors. Fundamental news therefore drove most stock returns more than rumors about political deals did. Markets turned more pessimistic on growth mid-month and declined, but European equity markets managed to hold onto gains even as US markets ended in the red.

The dispersion among stocks and corporate bonds meant that hedge fund managers had the environment in which stock or credit selection skill was rewarded (i.e., alpha was possible). Beta management mattered greatly, though, as too much beta easily swamped alpha generation. Credit-oriented hedge funds continued to outshine funds in other strategies. The Lyxor L/S Credit Arbitrage Index gained 1.7% in October, yielding an 8.2% gain for 2012 thus far. The index has gained every month this year except for one (May). The active management of net exposure and the choice of short positions during a fundamentals-oriented month has been a major driver for Long/Short managers. A similar narrative played out for managers in the Lyxor Distressed Index (+0.6% this month and +6.3% year-to-date) and the Convertible Arbitrage Index (+0.5% this month and +3.6% year-to-date).

Stock selection mattered greatly for L/S Equity managers. Despite the down month for US equities, the Lyxor L/S Equity Long Bias Index gained 0.4% and the L/S Equity Market Neutral Index gained 0.7%. The L/S Equity Variable Bias Index declined 0.4% and the Statistical Arbitrage Index declined 1.5% as correlations rose toward month-end. Long positions in financials and in European equities were themes that paid off during the month.

The Merger Arbitrage Index declined 0.7% as spreads widened. Managers with higher risk budgets or exposures outside the US fell most. Political concerns (but not the usual European debt situation rumors) spiked a number of spreads wider. The Special Situations Index was flat on the month. Managed Futures continue to find little traction. The Lyxor Long- Term CTA Index declined 3.6% (-7.1% year-to-date) and the Short-term CTA Index fell 2.5% (-2.5% year-to-date). Managers were typically long bonds, equities, energy, and precious metals. Risk asset prices tumbled during the month and caused losses, but positions in potentially offsetting assets did not offset the losses.

Uncertainty regarding the outcome of the US elections has risen, leading managers to reduce risk somewhat in October. We expect hedge fund managers to express stronger convictions now says Stefan Keller, Head of Managed Account Platform Research & External Relations at Lyxor AM.

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