Indifferent Short Term Hedge Fund Performance Masks Longer Term Gains

by Phillip Morton, Investors Offshore.com

21 July 2006

Despite their recent lacklustre performance, hedge funds have considerably out-performed equity markets in the past year and still represent a sound investment, according to Greenwich-Van Advisors, LLC, which tracks hedge fund returns.

After an impressive start to the year, hedge funds were affected by the volatility which struck the equity markets in May, a month when hedge funds lost on average 0.91%, according to the Greenwich Van hedge fund index. This was followed in June by a return of -0.4%.

However, according to Wade McKnight, Vice President of Greenwich Van, investors should look beyond this short-term dip in performance to cumulative returns produced over the longer period of time.

"While hedge fund returns in May and June have slowed, over expanded periods of time they continue to present compelling evidence that hedge fund exposure has proven beneficial," noted McKnight.

"Over the past 6 and 12 months, hedge funds have delivered 50% more return than the S&P 500, with much less volatility. Over the past 60 months, hedge funds generated over 100% more return than the S&P 500 and MSCI World Equity Indexes, with roughly a third of the volatility," he added.

According to Greenwich Van's preliminary results for June, futures managers and emerging market managers suffered most last month, while short sellers benefited from the decline in equity markets.

The Barclay Group, a hedge fund advisor which also compiles a performance index, also reported a negative month. According to an early estimate of the Barclay Hedge Fund Index, hedge fund performance slid by 0.32% in June, which followed a 1.82% decline in May.

Sol Waksman, founder and president of The Barclay Group, reported a similar pattern of performance across the various strategies.

“Directional equity strategies were the hardest hit. But as we would expect, equity short bias and most arbitrage strategies did well," he observed.

In June, 13 of Barclay’s 18 hedge fund indexes lost money. The Emerging Markets Index dropped 1.16%, Equity Long Bias fell 0.96%, and Technology was down 0.81%. Meanwhile, Equity Short Bias was up 0.92%, and the Merger Arbitrage Index gained 0.67%.

Despite the reversal in emerging markets, strategies focusing on emerging market equities are among the strongest performers over recent months, and the Barclay Emerging Market Index is up 7.55% year-to-date.

Similarly, the Credit Suisse/Tremont Index reported that its emerging market index declined 5% in May and 0.14% in June, although it remains up by 7.23% year-to-date.

Overall, the Credit Suisse/Tremont Hedge Fund Index declined by 0.11% in June as successive gains of more than 5% in short biased strategies over the past two months helped to mitigate losses in other areas.

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