The Hedge Fund Edge

Date: Wednesday, October 17, 2007
Author: Lenny Broytman, Riskcenter.com

The financial landscape might be in ruins but you certainly wouldn’t know it by sneaking a peak into the average hedge fund’s portfolio.

According to an article on hedgeworld.com, a report from Credit Suisse Index Co. says that many hedge funds recover from market volatility much quicker and easier than many other sectors.

After posting declines in the month of August, results from several hedge fund index providers suggest that many funds did indeed bounce back fairly nicely. It’s been reported that the Hedge Fund Research Inc. hedge fund index increased 2.98 percent for the month of September, while the Hennessee Hedge Fund Index rose 2.26 over the course of the same period.

Of course, many are quick to point out the undeniable fact that these same funds have in fact gotten a helping hand from a healthy equity market that has seen the Dow Jones Industrial Average rise more than eight percent from mid-August through to the very end of September. 

Even despite that fact, the hedge fund sector has maintained a fairly decent history in regards to getting back on their feet after periods of economic distress – much faster than their global equity and debt markets counterparts. According to the Credit Suisse Index Co. report, most fund strategies were able to get out of the red within a year of a major financial meltdown.

Aiding Credit Suisse in their findings was information regarding the Asian financial crisis of 1997. In the study, Credit Suisse notes that immediately after market volatility was at its all-time high, fund strategies displayed de-correlation with broader markets. The Credit Suisse/Tremont Hedge Fund Index showed a rather impressive return of 23.62 percent from July 1997 to June 1998. Furthermore, emerging markets funds suffered a devastating 17.6 percent drop over the 12-month period. Global Macro and long/short equity however, returned 40.53 percent and 26.21 percent, respectively. During the same period of time, almost all of the other hedge fund strategies showed positive returns.  

One of the other cases studies for Credit Suisse was the financial panic that followed in the summer of 1998 when the Russian ruble plummeted and that nation’s credit market crashed shortly after. This was immediately followed by the now infamous Long-Term Capital Management situation. Nevertheless, managed funds continued healthy gains from July 1998 to June 1999, returning 15.86 percent over the course of the 12-month period. At the same time, long/short equity showed a 17.28 gain.

When tech stocks plummeted in 2000, hedge funds remained afloat amidst a nervous economy and tallied a 44.09 percent return from April 2000 to March 2001. On the same note, convertible arbitrage, global macro and managed futures showed returns of 31.77 percent, 20.43 percent and 13.27, respectively.

"Hedge funds are able to take advantage of new opportunities, such as those created in the past few months, in order to generate absolute returns," the authors of the study wrote.