Hedge Fund Returns Stuck In The Doldrums

by Carla Johnson, Investors Offshore.com

18 May 2005

With the major hedge fund return trackers continuing to report their monthly performance figures, it has become clear that April, and indeed 2005, has been one of the gloomiest periods for hedge funds performance for quite some time.

On Monday, the CSFB Tremont Hedge Fund Index, which tracks the performance of more than 400 managers, reported a fall of 1.04% last month, its worst monthly performance since July 2002 when it lost 1.35%. The loss leaves the index down 0.11% for the first four months of 2005.

"Overall, it was a difficult month for hedge funds, with only two of the ten sectors of the universe reporting positive returns," observed Oliver Schupp, president of Credit Suisse First Boston Tremont Index LLC and senior member of the hedge fund investments group at CSFB.

"The continued liquidation of positions in convertibles resulted in a return of -3.13% for the Convertible Arbitrage sub strategy," he explained. This strategy is now 5.76% down on a year-to-date basis, according to CSFB/Tremont Hedge fund Index.

Meanwhile, convertible hedge funds tracked by the Van Global Hedge Fund Index lost 3.8% on average last month, contributing to an overall decline in the index of 1.4% net in April.

The Van US Hedge Fund Index, which measures the performance of US-domiciled hedge funds, declined -1.7% net, while the Van International Hedge Fund Index, a composite of returns of funds domiciled outside the US, fell -1.2% net. For the year, the Van US Hedge Fund Index is down -1.6% while the Van International Hedge Fund Index has risen 0.2% net.

“April was a difficult month for hedge funds,” noted George Van, Chairman of VAN.

“Only one-third of managers who reported to VAN were profitable, and convertible arbitrageurs, once a bastion of stable returns for hedge fund investors, experienced their worst loss since January 1995. This was caused by credit spreads widening and continuing redemptions from the strategy," he added.

However, while most strategies lost last month, short-biased strategies, those taking positions in equities in anticipation of a fall in the company share price, have gained considerably in recent months.

The CSFB/Tremont Dedicated Short Bias strategy gained 5.57% in April, and is now up by 20.8% year-to-date.

"For the fourth month in a row, the Dedicated Short sub strategy reported the strongest return, as several sectors of the US economy suffered in April," noted Mr Schupp.

Also, short selling was the only one of Van's 13 individual strategies to post a positive return in April, gaining 4.6% net and taking the year-to-date return to 9.1%.

Elsewhere, some of the biggest losers in recent months have been managed futures hedge funds, which follow price trends in a wide variety of securities, often using computer models.

The CSFB/Tremont Managed Futures funds lost 3.45% in April, leaving the strategy down 8.25% on average this year. Van's Futures funds and Aggressive Growth funds fared little better, dropping 6.0% net and 5.5% net respectively.

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