The Lyxor Hedge Fund Index was in positive territory at the end of May in spite of a slightly negative performance of -0.55% during that month (+0.96% in 2012).
Five Lyxor Strategy Indices out of 14 ended the month in positive territory, led by Lyxor CTA Short Term (+5.35%), Lyxor CTA Long Term (+2.21%) and Lyxor Distressed Securities (+0.66%).
Politics overshadowed everything else this month. After days of uncertainty and the inability to form a coalition government, new elections were called in Greece for June the 17th. These elections have increasingly taken the form of a referendum on a Greek Euro exit. The “game of fear” between Greece and other European countries rattled markets as uncertainty on Greece’s future inside the Euro zone rose to unprecedented highs. Contagion however, remains the real issue. Spain was in the spotlight as doubts mounted on the government’s ability to weather a troubled banking sector recapitalization. Political uncertainty and contagion fears were not alleviated by more fundamental indicators. In Europe, April leading indicators plunged (including in Germany), underscoring that activity would probably again contract during the second quarter.
The Lyxor Long-Term CTA Index gained 2.2% in May 2012, building on the 1% gain in April. The Lyxor Short-Term CTA Index posted a striking 5.3% gain in May. The persistent and worsening pessimism in the markets led to a number of strong trends that CTA managers were able to capture. Strong gains were generally made in the foreign exchange and fixed income markets, as the flight toward safe have assets continued throughout the month. CTAs tended to be long the US dollar, long the Japanese yen, and long US Treasuries, and these assets gained strongly as investors rotated into these and away from risk assets. A number of funds were still modestly long equities, but these positions have been trimmed as the trend has turned downward; the gains in other sectors generally outweighed equity market losses. Given the strong gains, some funds have recently increased their risk exposures. The Lyxor Long-Term CTA Index now stands at +0.98% year-to-date and the Short-Term Index stands at +1.84%.
Foreign Exchange-oriented, Market Neutral, and Statistical Arbitrage strategies also offered protection. Like CTAs, managers focused on foreign exchange markets were able to sidestep the carnage in equity markets and made gains on the back of US dollar and Japanese yen strength. Hedge Fund managers who engaged in equity strategies with little directionality also managed to preserve or create value over the month, with the Lyxor L/S Equity Market Neutral Index staying flat on the month and the Statistical Arbitrage Index gaining 0.45%.
Many other hedge fund strategies posted modest losses as volatility and correlations across assets climbed. The Lyxor L/S Credit Index declined 2.45%, but losses were concentrated among the more directional managers. The Convertible Arbitrage Index declined 0.88% as credit markets suffered from outflows and rising spreads, especially for high yield assets. Within the L/S Equity space, the Variable Bias Index declined 1.84% and the Long Bias Index declined 4.05%. The Special Situations Index declined 2.75% and the Merger Arbitrage Index fell 0.37%. European-oriented managers, not surprisingly, were more hardly hit than managers focused on other geographical regions, and managers with precious metals exposure suffered from the sharp decline in this asset class.
“With long term US Treasury yields at levels not seen since 1946 and German Bund yields at record lows, investors are no longer searching for yield but rather screaming for a place perceived as safe. In this context, hedge fund performance has been particularly resilient”, says Scott Mixon (pictured), Senior Portfolio Manager and Strategist at Lyxor AM.
