Hedge Funds Rally To Best Monthly Results In 9 Years

by Phillip Morton, Investors Offshore.com

13 July 2009

Showing an increased appetite for risk, hedge fund managers posted the best monthly performance in over nine years since February 2000 with a return of 4.1% in May.

Returns were positive across all major hedge fund strategies in the Credit Suisse/Tremont Hedge Fund Index except for Dedicated Bias, which was down 5.5%. Credit Suisse’s analysis further noted that certain managers and strategies that have lagged in performance during the course of the market rallies of the last three months are also among the few who performed well during the severe market dislocations in 2008. Managed Futures and Dedicated Bias, for example, had positive performance of 10.9% and 11.1% in 4Q 2008, respectively, but are down 5.2% and 9.0% year-to-date.

Convertible Arbitrage outperformed the next best strategy (Emerging Markets) by 6.7% with a 19.1% year-to-date performance, boosted by strong credit markets, and nearly USD6bn in new Convertible bonds issuances in the US for the month. The strategy’s recovery from the sharp drop in value that occurred in 4Q 2008 still has quite a bit of ground to cover before it re-values to the highs it achieved in 2007. The strategy has been helped by a drop in investment grade loans, which were down 40% in Q1 2009 from Q1 2008, as the bank market pulled back some of its available capital in order to conserve cash and strengthen capital positions. On the other hand, corporate investment grade bond issuance was up 124% in 1Q 2009 from 1Q 2008, as many companies turned to the debt capital markets, including convertibles, for their funding needs.

Key findings from the report include:

• Emerging Markets managers, up almost 7% in May, benefited from increased optimism about global growth and rising commodity prices, with Eastern European-focused managers outperforming other regions for the third month in a row.
• Convertible Arbitrage funds continue to make a comeback, finishing up 5.8% for the month. In the US, the nearly USD6bn in new convertible bond issuances were met with healthy demand from a spectrum of investors.
• Many Long/Short Equity managers increased their net long exposures resulting in a 5.2% return for the month, the highest monthly return for the strategy since June 2000. Some remain cautious that a switch from a government-led recovery to a consumer-led recovery may face hurdles.
• The Global Macro sector generated positive returns for a seventh consecutive positive month, finishing up 1.5%. The strategy’s flexibility and tactical trading ability may have helped managers to post positive returns during both up and down equity market environments in 2009.

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