Credit Suisse/Tremont index posts gain after six months of negative returns

Date: Wednesday, February 25, 2009
Author: Hedgeweek.com

Following six straight months of negative returns, the Credit Suisse/Tremont Broad Hedge Fund Index posted a gain of 1.09 per cent in January, while US equity markets had their worst January in decades.

A new monthly publication from Credit Suisse/Tremont shows that as risk appetite returned to financial markets, spreads for corporate bonds improved and crossover buyers emerged, convertible arbitrage posted a return of 5.72 per cent in January, the best monthly performance of all the strategies in the Credit Suisse/Tremont Broad Hedge Fund Index for the month.

Although convertibles had one of the year's worst performance of all index sectors last year, many believe that the fundamental and technical reasons for convertibles' devaluation in 2008 may correct as credit markets begin to stabilize and if deleveraging continues to abate.

The report says the extent of convertible bonds' devaluation following the Lehman collapse in September is such that, in December and January, convertibles' yields were more attractive than straight bond yields with similar maturity and seniority in the capital structure, essentially attributing no value to the bonds' equity option.

'This cheapening of the asset class points to convertible arbitrage as a strategy that could rebound strongly in 2009 if conditions in the credit markets continue to improve,' it states.

Relative value managers as a whole (convertible arbitrage, fixed income arbitrage and equity market neutral) were up for the month, buoyed by improving credit markets and increasing central bank and government interventions.

There was concern in the markets, however, about weakening demand for treasuries due to the estimated USD2.5trn of issuance in 2009 that will be needed to fund the US stimulus package and other government initiatives, causing treasuries to drop 3.8 per cent in January.

Nonetheless, Credit Suisse Research believes that the likelihood of further interest rate cuts as well as the very weak macro environment around the world is likely to support bond markets as investors continue the 'flight to safety,' and should continue to generate opportunities for relative value managers.

Global Macro managers started the year on a strong note, with the index up 2.33 per cent, profiting from the steepening yield curves and strengthening of the US Dollar.

Credit Suisse Global Macro analysts have suggested that while many traditional mean-reverting relationships have deteriorated due to changes in the financial landscape in 2008, new conditions have been born which present opportunities for hedge funds prepared for the new investment regime.

Increased government action in recent months created an environment that was favourable for managers focused in tactical, short-term trading.

This held true for certain funds in the long/short equity space as well, where managers with low levels of gross exposure and shorter-term trading strategies were able to profit from the movements in the volatile equity markets. However, the sector finished down for the month as fundamental managers struggled to keep up with market movements.

Dedicated short bias managers performed particularly well this month with a return of 3.69 per cent, as short side positions benefited from falling equity prices.

There was generally a wide range of dispersion between the individual fund returns within each sector in the Broad Index for January.

Going into 2009, the hedge fund landscape looks significantly different than it did 12 months ago, says Credit Suisse/Tremont.

In January of 2008, long/short equity was the largest sector in the Credit Suisse/Tremont Broad Index, representing almost 30 per cent of all hedge funds.

Over the past year, the strategy has shrunk to 23 per cent of the index, and is now the second largest sector behind event driven.

Other notable changes include the five per cent gain seen in the Global Macro space.