Hedge funds strategies positive as markets trade in consolidation mode

Date: Wednesday, August 12, 2009
Author: Hedgeweek.com

All hedge fund strategies posted positive performance in July as global stock markets traded in a consolidation mode on better quarterly earnings and forward-looking expectations of better economic conditions ahead, according to research by Lipper.

Equity-focused and directional strategies outperformed relative-value and credit-focused managers for the month.

Resuming the trend shown in April and May, the best performing strategy in July was long only, posting an impressive return of 4.75 per cent month on month (+14.34 per cent year to date), followed by option arbitrage (+0.88 per cent) and long/short equity (+0.81 per cent).

Not surprisingly, multi-strategies (+0.81 per cent) performed relatively well at the end of the month as all hedge fund strategies finished the month of July in positive territory.

Event-Driven was the worst performing strategy, posting a 0.19 per cent return.

Global stock markets climbed 8.50 per cent in July as reflected in the MSCI World TR Index reading, with the US equity market rising 7.56 per cent, according to the S&P 500 Index, as quarterly corporate earnings reports and better-than-expected home prices and new home sales buoyed investor confidence about an imminent economic recovery.

Developed markets rallied; the S&P Global BMI Developed Index closed at 8.61 per cent month on month, with 12 of the 24 developed countries included in the index posting double-digit returns.

All emerging markets-except Morocco, declining 5.23 per cent-registered gains during the month, with ten of the 21 countries posting double-digit gains.

BRIC members performed relatively well for July, led by China (+11.27 per cent) and Brazil (+9.44 per cent). The top gainers on the performance league table were Poland (up 25.69 per cent) and Indonesia (up 20.94 per cent).

Equity hedge strategies-with long only top-ranking the performance league table for the month-displayed solid performance in line with global stock markets. Dedicated short-bias also ended July in positive territory (+0.40 per cent) as short-sale strategies were profitable in the first half of the month.

All sectors posted positive performance, led by materials-posting a double-digit return of 13.31 per cent at the end of the month. Despite analysts' continuing to cut forward 12-month earnings estimates in the industrials and information technology sectors, those two along with consumer discretionary were the runners-up on the performance league sector table in July, posting 9.24 per cent, 9.14 per cent, and 9.37 per cent monthly returns.

Small-cap stocks beat large- and mid-cap stocks, and value stocks outperformed growth stocks for July.

Despite volatility spikes at the beginning of the month, convertible arbitrage managers (+0.35 per cent) generated positive returns for the sixth consecutive month in July on rising stock markets and tightening credit spreads.

Event-driven managers ended the month in positive territory, with risk arbitrage managers performing relatively better as the increase in US deal flow and the value of acquisitions in July (with M&A activity almost three times higher than that of June) sustaining the performance of the substrategy.

Both Europe and US high-yield markets performed well, closing at 8.29 per cent and 6.18 per cent, according to Merrill Lynch HY TR Index, with corporate spreads' tightening pattern continuing to hit the market in July and ending the month at levels last observed at the beginning of August 2008.

Commodities registered positive returns for July (the Reuters/Jefferies CRB Index increased 3.00 per cent month on month) as base metals (with nickel, copper, and aluminium driving the rally), heating oil, and soft commodities sustaining the performance of the index.

In the FX market the US dollar declined 2.26 per cent month on month in July, according to the ICE Futures USD Index (a trade-weighted geometric average of six currencies) as rising equity markets sparked unwinding of cautious trading positions.

The Asian stock market rally lifted most Asian currencies against the greenback, while among Central Europe's currencies the Hungarian forint was a clear outlier as the sovereign debt market responded positively to a 100-bp rate cut.