Hedge funds benefited from comforting macro news flow and the Lyxor Hedge Fund index gained 1.1% over December, bringing year-to-date performance to 3.1%. The headline numbers hide an even more positive picture. A growing number of funds have participated in rising markets and 20% of the funds in the Lyxor investment universe are up double digits in 2012.
Supported by bullish credit markets and many opportunities in sovereign debt, L/S Credit managers clearly exceeded expectations in 2012. The Lyxor L/S Credit Arbitrage Index ranked first among Lyxor indices and staged a 12.1% return with less than 3% volatility.
L/S Equity Long Bias managers were quite successful in capturing the bulk of equities’ performance with a much lower risk profile. By contrast, the Lyxor L/S Equity Variable Bias index lost 0.5% over the year as many managers were slow to add exposure during risk-on periods. The abnormally low cross sectional equity dispersion also impaired market neutral L/S Equity strategies whether discretionary or systematic. Following negative returns in December, the Lyxor L/S Equity Market Neutral Index and Lyxor L/S Equity Statistical Arbitrage Index modestly advanced 2.9% and 2.8% respectively over 2012.
Merger Arbitrage strategies surprised to the upside in December with the Lyxor Merger Arbitrage Index staging a 2.96% return thanks to three major deals that found positive outcomes. With the December gain, the Lyxor Merger Arbitrage Index closed the year up 6%, providing steady returns with a conservative budget risk in 2012. Special Sits managers gained traction as well in December amid the buoyant share buyback activity. The Lyxor Special Situations Index was up 1.4% over the month, which pushed 2012 performance to 4.9%. Though Distressed strategies stalled as a whole in December, they offered the best yearly return among event driven strategies, as shown by the 6.5% rise in the Lyxor Distressed Securities Index.
The Convertible Arbitrage strategy remained a credit play rather than volatility-related theme. Convertible issuance, a major source of revenue for Convertible Arbitrage funds continued to decline in 2012 to reach about $20 billion after $25bn in 2011 and $35bn in 2010, weighing on performance. The Lyxor Convertible Bonds & Volatility Arbitrage Index advanced 4.5% over 2012.
A more favorable positioning translated into a 1.4% gain in the Lyxor Global Macro Index over December. Generally, Macro funds turned net long equity towards year end and kept concentrating their overall long interest rate exposure on Europe where the ongoing convergence among Eurozone nations offered attractive opportunities. Performance for the year hardly reached 4%.
CTAs stabilized in December after struggling during most of the year. The Lyxor CTA Short Term and Long Term indices dropped 4% and 6.7% respectively in 2012. The poor performance can be traced back to a number of factors: the lack of lasting trends; the high correlation levels between asset classes; the many turnarounds in foreign exchange markets; misplaced bets on precious metals.
“Managers have now implemented their constructive views about the start of 2013 and have put risk back on the table. Net long positions in Financials in L/S Equity portfolios and a majority of single-B rated papers among Credit Arbitrageurs’ holdings are testimony to this” says Stefan Keller, Head of Managed Account Platform Research & External Relations at Lyxor AM.
