Hedge fund strategies gain ground as stock markets edge upward

Date: Tuesday, September 15, 2009
Author: HedgeWeek

Hedge funds continued their winning streak in August, with all hedge fund strategies except dedicated short-bias (-1.22 per cent) ending the month in positive territory, according to a report by Lipper.

The stock market rally was sustained by positive economic reports and a big bump in US home sales. Directional managers outperformed relative-value and event-driven strategies at the end of the month.

Long bias was once again the best performing strategy, posting a striking return of 2.37 per cent month on month (+18.06 per cent year to date). Fixed income arbitrage (+1.25 per cent), long/short equity (+1.02 per cent), and managed futures (+1.03 per cent) were the runners-up in the performance league table.

Global stock markets were up 4.20 per cent in August as measured by the MSCI World TR Index, with the US equity market rising 3.61 per cent as reflected in the S&P 500 TR Index reading. Developed markets performed relatively well compared to emerging markets. In particular, the S&P Global BMI Developed Index edged up 4.23 per cent month on month, with Austria (+15.95 per cent) and Belgium (+10.83 per cent) posting double-digit returns.

Conversely, emerging markets posted losses during the month, with China (-7.13 per cent), Taiwan (-4.01 per cent), and Chile (-3.60 per cent) lagging. The top gainers on the performance league table were Hungary (+12.93 per cent)-the only country posting a double-digit gain-and Poland (+9.13 per cent).

BRIC members performed poorly during the month, dragged down by China and India (-0.57 per cent).

Long bias and long/short equity funds focusing on US companies continued to deliver positive returns in line with the global stock markets, though not at the same magnitude as in July. Nine of the ten sectors included in the S&P 500 Index were up in August, led by financials (+12.86 per cent) and industrials (+4.14 per cent).

Telecommunication services ranked at the bottom of the performance league table and was the only sector posting a negative return (-2.42 per cent). For the year to date information technology-with a 38.61 per cent gain-continued to dominate the sectors, followed by materials (+29.72 per cent) and consumer discretionary (+21.52 per cent).

Large-cap stocks beat mid- and small-cap stocks, and value outperformed growth stocks at the end of the month.

Convertible arbitrage managers experienced another good month in August, returning 0.76 per cent for the month and 15.03 per cent for the year to date. Tightening credit spreads and rising stock markets were the key drivers of performance, while volatility as measured by the CBOE VIX Index was almost flat, increasing slightly from 25.92 on 31 July to 26.01 at the end of August.

Event-driven managers also performed well during the month. M&A deal volume in the US struggled in the first three weeks of the month but was jolted on 31 August when Walt Disney announced the USD4bn purchase of Marvel Entertainment and Baker Hughes purchased oilfield-services company BJ Services for USD5.5bn, pushing total volume for the month up 40 per cent.

Though declining from the previous month, high-yield bond markets maintained their streak of consecutive gains for the sixth month. Both European and US high-yield markets as measured by the Merrill Lynch HY TR Index generated positive returns, closing at 3.80 per cent and 2.03 per cent, respectively, with spreads narrowing further. The most speculative CCC-rated tier returned 3.42 per cent for the month and outpaced the higher-rated BB (+1.80 per cent) and B (+1.17 per cent) sectors.

The Commodities Reuters/Jefferies CRB Index showed signs of losing momentum, dropping 1.46 per cent month on month as gains in base metals and soft commodities were offset by large losses in energy and livestock. While copper (+13.09 per cent) and lead (+12.12 per cent) trended higher in August, natural gas (-24.62 per cent) declined significantly and lean hogs also sold off hard (-10.65 per cent).

In the FX market the US dollar continued to erode in value against major currencies. Central Europe's currencies had mixed performance; the Czech koruna and Polish zloty appreciated, while the Hungarian forint slipped. Meanwhile, falling commodity prices put pressure on commodity currencies-namely the Australian, Canadian, and New Zealand dollars.