S&P Hedge Fund Index Declined In March

by Carla Johnson, Investors Offshore.com

07 April 2004

March hedge fund performance as measured by the Standard & Poor’s Hedge Fund Index showed an unusually close correlation to equity performance, ending the month down 0.12% under increased geopolitical concerns and volatility in equity markets, the firm announced this week.

However, year-to-date, the performance of the S&P index continued to outpace equities, up 1.9% against a return of 1.3% from the S&P 500.

Commenting on the results, Charles Davidson, senior hedge fund specialist, Standard & Poor’s noted: “With widening credit spreads in the wake of Madrid bombings on March 11, we tracked a negative impact on Distressed positions.”

“We also saw a continuation through March of increasing deal volumes in Merger Arbitrage funds, however tight spreads have somewhat limited profit potential,” he added.

The Directional/Tactical Index, the only sub-index to show a gain with 0.45% for the month and 3.2% for the year, showed little net movement as currency and metals gains by Macro traders were offset by losses from reversals in fixed income and currency cross positions by Managed Futures funds.

The Equity Long/Short basket was up slightly from a net long exposure in the rising Japanese market. Macro benefited from long exposure to metals and short financial futures in Japan where investor confidence in the local economy continued to rise.

The Arbitrage Index was down in March losing 0.61% for the month as continued underperformance by Equity Market Neutral and a backup in prepayment rates after falling yields earlier in the month adversely affected mortgage traders in the Fixed Income Arbitrage strategy.

The S&P Managed Futures Index fell in March in conjunction with the S&P 500, a somewhat unusual correlation as the S&P MFI has historically tended to show a fairly strong negative correlation to falling equity markets.

"Generally speaking, exogenous shocks to equity markets, such as significant geopolitical events, are beneficial to Managed Futures programs. In this case, performance suffered due to a temporary flight to quality in the fixed income market and violent reversals in currency markets," observed Davidson.

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