Energy Sector Drives S&P Hedge Fund Index To August Gain

by Carla Johnson, Investors Offshore.com

12 September 2005

Standard & Poor's announced last week that hedge fund returns as measured by the S&P Hedge Fund Index (S&P HFI), gained 0.32% in August with energy, and all of its related markets, driving performance throughout the month.

"There are three main factors supporting energy prices at their current levels," says Justin Dew, Senior Hedge Fund Specialist at Standard & Poor's.

Mr Dew added that:

"One is the ever-present China/India growth story - a seemingly insatiable demand for energy as these countries seek to emerge into viable, first world economies. The second is a largely unmotivated oil discovery market yielding little new reserves to support the massive new consumption. Lastly, Hurricane Katrina decimated oil production facilities and refining capabilities in the Gulf Coast region of the United States. The confluence of supply/demand factors, and the exogenous shock of hurricane Katrina, drove positive performance in many hedge fund sectors including Managed Futures, Long/Short Equity, Macro, Distressed and Special Situations."

With global energy-related markets rising strongly during the month, the S&P Directional/Tactical Index gained 0.67% in August.

The S&P Managed Futures Index returned 4.11% in August, with major gains in the sector being seen throughout the month on long positions in the energy market. Significant profits were made in the sector during the month, with the price of oil rose rising from a low of $60 a barrel to a high near $70, and the price of wholesale unleaded gasoline rising from a low of $1.66 per gallon to a high of $2.25.

In the Equity Long/Short sector, gains were seen particularly in Asia investments as it has become clear that Prime Minister Koizumi would return to power in Japan, continuing his reform focus. This positively affected stocks in Japan and to a lesser extent, the region. The technology sector was profitable for some managers in August as prices rebounded from exceedingly low levels in a number of key positions. Energy related profits were also garnered from positions in companies directly related to the oil/gas production sector, and in companies specifically dedicated to the repair of rigs and oil pipelines.

The S&P Event-Driven Index gained 0.61% in August as all three of its underlying strategies ended the month with positive returns. In the Distressed sector, a long-standing bankruptcy has begun to show signs of a beneficial outcome to creditors, yielding sizeable gains for some managers in August. In the Merger Arbitrage sector, a good number of deals closed during the month of August with a sizeable number of new mergers being announced. This has resulted in slightly positive returns for the month, and a positive outlook for the sector going forward.

The S&P Arbitrage Index lost 0.32% in August led lower by the performance of Fixed Income Arbitrage, though all three of its sectors experienced losses on the month. In the Convertible Arbitrage sector, August was a rather lackluster month as the market cheapened slightly, due in part to anticipated quarter-end redemptions in convertible bond hedge funds. In addition, a fairly benign month in terms of trading and origination caused bid-offer spreads to widen, exacerbating an already slow month. In the U.S., August was unusual for the Equity Market Neutral sector, as neither growth nor value models yielded profits for managers. This was not true however in Europe as models there were able to capitalize on a moderately strong equity market.

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