Alternative Investments Fail To Deliver in 2005

by Carla Johnson, Investors Offshore.com

11 May 2005

The year 2005 has not been kind to alternative investments. A quick review of the Cogent Dynamic Averages shows that the typical alternative investment is down 0.65% for the year to date through April.

Futures managers are down 5.72% while all single manager funds have lost 0.035%. As the worst performing of the four dozen investment strategies tracked by the CogentHedge database, the aggregate of all convertible arbitrage funds (currently 104 entities) has lost ground in every month of 2005, and are as of end-April down 7.91%.

This performance is not unprecedented. CogentHedge allows the same Drawdown Analysis in respect of the Dynamic Averages as can be applied to individual alternative investments. A quick review of prior history shows that hedge funds have seen tough times in the past. In fact, Convertible Arbitrage strategies, currently the whipping boy of the hedge fund category, has a long way to go before it matches the losses experienced by several other strategies over the past five years.

The largest drawdowns (from peak to trough) by investment strategy since January 2000 are as follows: Emerging Markets Equity 20.03%; Options Trading 18.57%; Capital Structure Arbitrage 17.15%; Short Selling 13.42%; L/S Growth 11.28%; Corporate Restructuring 10.74%; L/S Value 10.37%; and Convertible Arbitrage at 9.85%.

However, adding to the weak hedge fund results announced already by the likes of Van Global and Standard & Poor's, the Hennessee Group, an adviser to hedge fund investors, yesterday revealed that weak equity markets contributed to negative performance of hedge funds in April, as the Hennessee Hedge Fund Index declined 1.75%. The Index is also down 1.62% on a year-to-date basis.

“Hedge fund managers are expressing their own ‘conundrum’,” stated Charles Gradante, managing principal of Hennessee Group LLC. “The decline in oil prices was significant, but not enough to turn the market around. The ‘S’ word, Stagflation, has resurfaced in our conversations with equity hedge fund managers.”

The Hennessee Long/Short Equity Index declined 2.19% (3.10% YTD) in April as poor retail sales, slumping housing costs, and low consumer confidence caused a market sell-off, pushing the market to six month lows.

The Hennessee Arbitrage/Event Driven Index was down in April, returning 1.32% (0.71% YTD), as the convertible bond sell-off continued, creating the worst convertible arbitrage environment since 1994. Despite an increase in equity volatility, the convertible market was negatively effected by widening credit spreads, continued problems at General Motors (the largest issuer of convertible bonds), and continued redemptions from investors.

The Hennessee Global/Macro Index declined -0.82% (+0.99% YTD) in April. Macro hedge funds were flat in April as the Treasury markets and gold rallied, but commodities and oil sold off as investors moved to quality due to concerns of an economic slowdown. Globally, international markets sold off after a strong first quarter performance, where they outperformed US markets.

“Macro managers reported that they made money short oil, short the S&P 500 contracts, and long the yen vs. the U.S. dollar,” commented Mr. Gradante.

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