Hedge Funds Up 1.5% Last Month Aided By Surprise Boost In Convertible Arbitrage Returns

by Carla Johnson, Investors Offshore.com

19 July 2005

A resurgence in returns from convertible arbitrage strategies contributed to a gain of 1.5% net of fees for the Van Global Hedge Fund Index in June according to hedge fund index provider Van Money Manager Research, LLC (VAN).

“Hedge funds posted strong returns on average during June. More than 80% of funds produced positive returns and beat the S&P 500,” noted Kevin Campbell, Vice President of VAN.

“Particularly noteworthy was the resurgence in convertible arbitrage. Many in the industry anticipated that returns in this strategy would not rebound until the third quarter due to pricing pressures stemming from quarter-end redemptions. News in mid-June that Marin Capital, a former billion-dollar convertible arbitrage shop, was closing portended further liquidations from the strategy. Instead, the sell-off in convertible bonds never occurred, and strong new issuance in the convertible market and attractive valuations provided managers in this strategy with investment opportunities," Mr Campbell added.

By strategy group, the Directional Trading and Long/Short Equity Groups were the top performing strategy groups in June, gaining 2.4% and 2.1%, respectively. The performance of the long/short equity funds is particularly noteworthy given the ordinary performance of many of the world’s equity indices. The Specialty Strategies and Market Neutral Groups also produced positive results, gaining 1.1% and 0.9%, respectively.

Twelve of VAN’s thirteen individual hedge fund strategy indices rose in June, led by Futures (3.1%) and Aggressive Growth (2.7%). Futures funds, which often employ a systematic trend-following system, profited from a flattening yield curve (via short positions in short-term U.S. treasuries and long positions in long-term treasuries), rising oil prices and trends in the currency markets. Aggressive Growth funds benefited from a positive environment for growth stocks as the Russell 2000 Growth Index gained 3.2% in June.

Nine of the individual global hedge fund strategy indices are now positive for the year, led by Emerging Markets, up 5.2% net, Short Selling, up 3.7% net, and Value, up 2.9% net. Futures and Aggressive Growth remain the worst performing strategies for the year with both down 0.9% net. The Market Neutral Arbitrage and Multi-Strategy Indices are the only other indices that are negative for the year.

Four of the six sub-strategies were positive in the month, led by Convertible Arbitrage (1.5%) and Special Situations (1.0%). Fixed Income Arbitrage and Statistical Arbitrage, conversely, were the two worst-performing sub-strategies (-0.3% and -0.2%, respectively).

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