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Defensively positioned long/short equity managers see profit in June

Date: Thursday, July 23, 2009
Author: HedgeFunds Review

Long/short equity managers who have maintained a cautious stance could be set to profit as markets shift from cyclicals (miners, energy stocks and consumer discretionary) to defensives (health care, utilities and consumer staples) in June, according to Credit Suisse/Tremont Index. The Credit Suisse/Tremont Hedge Fund Index ended up 0.43% for June, bringing year to date to 7.18%.

Convertible arbitrage funds posted the best performance of all the strategies in the index, with 4.05% for June and 23.95% cumulative performance year to date. As equity markets recovered in the second quarter, managers began to profit again from the volatility arbitrage aspect of the strategy.

Emerging markets finished the month relatively flat despite a rebound in economic activity in Asia as countries across the region saw rising industrial and manufacturing output.

Credit-oriented hedge funds performed well as credit markets showed healthy activity, with $102 billion of investment grade bonds brought to the market in June and with the first half of the year total high grade issuance coming in at $621 billion, slightly less than the full year total for 2008. Government activism in the markets continued in Europe, as the European Central Bank provided 442 billion in 12-month loans to financial institutions at a rate of 1% to boost liquidity. Many believe this could provide opportunities for credit-oriented hedge fund managers and to facilitate carry trades.

In the US the Fed continued its zero interest rate policy because of the mixed economic macro data. Relative value managers posted positive performance overall as yields dropped and spreads tightened as a rule.

Convertible arbitrage led the Index in monthly performance with a 4.1% return, its sixth straight positive month, which brought it to 23.95% year-to-date. Certain managers began to profit again from the volatility arbitrage aspect of the strategy on the back of the three-month recovery of equity markets starting in March. Earlier in the year the strategy received more attention as a credit play, given the devaluations many convertible bonds experienced in the fourth quarter of 2008

Global macro hedge funds posted their first negative monthly performance since October 2008 as the sell-off of short rates in US treasuries negatively impacted the positions of a number of Global Macro hedge funds early in the month.