Hedge Fund Returns Finish First Half On The Right Side Of Zero

by Phillip Morton, Investors Offshore.com

13 July 2005

Hedge funds appear to have shrugged off a tumultuous first half of the year according to the Standard & Poor's Hedge Fund Index, which has finished the first six months marginally in positive territory after a period when some hedge funds collapsed under the weight of trading losses and investor redemptions.

According to S&P, hedge funds finished the first half of 2005 up by 0.13% following a second consecutive monthly gain of 0.90% in June when all three of the sub indices in the main index recorded gains.

“Managers have become less risk averse due to a combination of more predictable monetary policy and contained inflation,” noted Charles Davidson, Senior Hedge Fund Specialist at Standard & Poor’s.

“This has encouraged greater confidence in asset allocations toward higher yielding risk assets and increased leverage to generate target returns. With the end of quarter redemption cycle behind them, managers are shifting focus from liquidity management to security selection with the objective of finishing the year on a high note," he added.

By strategy, The S&P Directional/Tactical Index gained 1.62% in June as global equity markets rose during the month. Equity Long/Short managers benefited from a net long exposure as reflected by gains of 1.82% and 1.92%, respectively, in the S&P ELSI US and S&P ELSI Global ex-US sub-indices.

By contrast, macro managers had a more difficult month, but still managed to gain overall. The S&P Managed Futures Index rose by 1.86% for the month of June as major profits were made on long positions in the U.S. dollar, bonds, crude oil, equity indices and grains. Metals such as gold and nickel, both of which reversed strong upward trends late in the month, contributed to losses.

Surprisingly, arbitrage strategies also gained during June, ending a terrible run of performance in recent months. The S&P Arbitrage Index gained 0.24% in June led upward by the performance of Convertible Arbitrage, which has had a difficult time coping with investor redemption selling, low volatility, tight credit spreads and low issuance.

"With the next major redemption window not coming until year-end, managers are using their relatively stable capital base to search for values among the many historically cheap securities," noted S&P.

Lastly, S&P's Event-Driven Index gained 0.85% in June as its three underlying strategies all ended the month in positive territory, led by merger arbitrage.

A brighter month for hedge fund investors was affirmed by monthly results from the Hennessee Group, which has reported a 1.5% increase in the Hennessee Hedge Fund Index for the month of June, outperforming the broader equity market benchmarks such as the S&P 500, which increased 0.14% and the Dow Jones Industrial Average, which declined by 1.84%.

However, Charles Gradante, Managing Principal of Hennessee Group LLC, noted that hedge funds returns are still being hemmed in by a number of restraints in the market place.

“Despite outperforming the broad market in June, hedge fund managers are still being handcuffed by a tight equity trading range, flattening of the yield curve, and low volatility,” Mr Gradante observed.

Within the main Hennessee index, the Long/Short Equity Index increased 1.68%, and is up by 0.52% year-to-date. The Hennessee Arbitrage/Event Driven Index was also up in June, returning 1.09% and 0.07% year-to-date. “Money is cautiously moving back into convertible bond arbitrage as the market seems to be oversold,” stated Mr Gradante.

The strengthening of the US dollar against the euro and the yen, in combination with a 4% rally in the price of crude oil last month helped the Hennessee Global/Macro Index to increase by 1.55% in June. The strategy is up 3.66% on a year-to-date basis.

Recommended