S&P Reports Third Consecutive Monthly Gain For Hedge Funds

by Phillip Morton, Investors Offshore.com

08 August 2005

Hedge fund returns, as measured by the S&P Hedge Fund Index gained 0.98% during the month of July, as all three of its sub-indices registered positive gains, Standard & Poor’s announced last week.

“Three main factors drove hedge fund performance in July – China’s revaluation of the yuan, rising corporate earnings, and a strong follow through of bull market indications first recognized in May,” noted Justin Dew, Senior Hedge Fund Specialist at Standard & Poor’s.

He added that:

“The Chinese announcement of the ‘revaluation’ of the yuan, even though slight, had a sizeable, albeit temporary, affect on the currency markets during July and was an indicator of further changes to come.

“In the equity sector, investors had been expecting single-digit earnings growth and were pleasantly surprised at the continued double-digit earning gains; this elation manifested itself in the form of strong equity market returns over the course of the month. Indications of a bull market continue to occur as exemplified by the current positive economic growth, increasing earnings and low inflation – all in addition to a sector rotation often seen in the beginning stages of a bull market.”

The S&P Event-Driven Index gained 1.51% in July as all three of its underlying strategies ended the month with positive returns.

The S&P Arbitrage Index gained 0.73% in July led upward for the second month in a row by the performance of Convertible Arbitrage, which had difficulties early in the year but has rebounded in recent months.

The S&P Directional/Tactical Index gained 0.7% in July as global equity markets rose strongly during the month. For the most part, managers in the S&P Equity Long/Short Index registered strong performance, returning 2.08%. The S&P 500 gained 3.60% during July in the face of terrorist attacks in London and Fed tightening, leading some managers to have faith in the rising corporate profit numbers and generating a more bullish outlook for the near term.

Specifically, positions held in the Financial and Semi-Conductors sectors profited, as did positions in the Energy sector as energy prices continued their ascent. Year-to-date through July, the S&P Equity Long/Short Index returned 3.15% versus 1.84% for the S&P 500.

In the Managed Futures sector, performance was flat to down as China announced a slight revaluation of the CNY causing temporary fluctuations throughout the currency market. Some Managed Futures models, which had been long bonds (short rates) for some time, experience sizeable losses in global fixed income markets as interest rates rose during July.

“Fixed income rates increased throughout much of the month on the heels of improving economic conditions in the U.S.,” added Dew.

“Only the London bombings early in July had a dampening effect on this trend and only temporarily," he added.

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