Rebound for hedge funds using statistical arbitrage strategies likely: Credit Suisse

Date: Friday, September 14, 2007
Author: James Langton, Investment Executive

A rebound for hedge funds that use statistical arbitrage strategies is likely, according to the latest research from Credit Suisse Index Co., Inc.

The new research examines the effects of recent market turmoil, including the effects of the subprime-related credit crunch on hedge funds. It notes that the market disruption has spilled over into other areas, particularly equity market neutral strategies that employ statistical arbitrage techniques.

“The models that drive these strategies are currently experiencing abnormal negative performance and high volatility caused by systemic pricing pressure driven by massive de-levering,” it says. The Credit Suisse/Tremont Equity Market Neutral Blue Chip Investable Index was down 0.41% in July and down 1.13% in August. And, the Credit Suisse/Tremont Equity Market Neutral Sector Invest Index was down 0.70% in August.

“While it is difficult to isolate the particular cause or duration of this market turmoil, managers reporting that the cause is not model specific, but lies in a systematic shift and technical selloff factor returns,” it says.

It also finds that the Credit Suisse/Tremont Equity Market Neutral Sector Invest Index recovered 1.2% from the worst drawdown in August.

“Cautious optimism has now returned as liquidity infusions take effect and investor fears have calmed,” according to Oliver Schupp, president of Credit Suisse Index Co. “As the flow of redemptions has been stemmed, an upward trend in performance has taken place in the Credit Suisse/Tremont Equity Market Neutral Sector Invest Index.”