Hedge Fund Returns Negative In August

by Phillip Morton, Investors Offshore.com

19 September 2007

The US sub-prime mortgage crisis, rising Chinese inflation and low US consumer confidence all combined to erode hedge fund returns in the month of August, according to Oliver Schupp, President of the Credit Suisse Index Co, which compiles the Credit Suisse/Tremont Hedge Fund Index.

“In August, the subprime mortgage contagion led to a widespread sell off that swept equities, commodities and low-grade credit markets. The sell off was exacerbated by the highest jump in the overnight loan rate in over six years and banks and brokerages reported declining values in credit investments," Schupp commented, announcing a 1.53% fall in the index, which tracks the performance of 456 funds.

Correspondingly, inflation in China accelerated to the highest rate in more than ten years, volatility soared and US consumer confidence reached its lowest level since 2005, he added.

He went on to note: “Overall, this market environment has negatively impacted the performance of all hedge fund sectors within the Credit Suisse/Tremont Hedge Fund Index. The Managed Futures sector was particularly affected, down 4.61% as an overall flight to quality by investors fuelled by subprime and credit-related concerns triggered reversals in most of the established trends (including energy, fixed income, and currencies) in the sector.”

However, the index remains up 7.03% on a year-to-date basis.

Greenwich Van reported similar results for its hedge fund index, which fell 1.38% in August according to data supplied by the 1,046 funds which have reported performance for the month so far.

"Ripple effects of the sub-prime fallout and the subsequent credit crunch created widespread uncertainty across the global markets, adversely affecting hedge funds in virtually all strategies," Greenwich Van stated. "Among those most impacted were managers with direct investments in credit securities. Income managers, particularly those employing significant degrees of leverage, were forced to sell securities often at deep discounts in order to reduce portfolio exposure and to meet margin calls by their creditors."

The Greenwich Global Income, Distressed Securities, and Special Situations Indices returned -0.70%, -0.86%, and -1.01%, respectively. Quantitative strategies that rely on consistent relationships between securities also had a difficult month, as evidenced by the -2.71% performance of the Directional Trading Group and the -1.36% return of the Equity Market Neutral Index.

All but three of the strategy sub-groups that make up the Greenwich Van Hedge Fund Index were in negative territory last month, with Short Selling the best performer, returning 1.49%. However, on a year-to-date basis, the index is up 6.63% and 17 of its 18 strategies are positive. By comparison, the S&P 500, MSCI World Equity, and FTSE 100 have YTD returns of 5.19%, 5.26%, and 1.34, respectively.

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