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Hedge fund index rises in February

Date: Wednesday, March 15, 2006
Author: James Langton- Investmentexecutive.com

Standard & Poor’s announced that hedge funds enjoyed positive returns in February.

The S&P hedge fund index gained 0.8% in February, and all three of the underlying style indices and eight of the nine strategies recorded positive results during the month. Year-to-date, the S&P hedge fund index has returned 2.83%.

According to Standard & Poor’s senior hedge fund specialist, Justin Dew, hedge fund performance during February was dominated by three main occurrences: a strong performance rally in the convertible arbitrage strategy, the strongest month for mergers & acquisitions since January of 2000, and an anticipation of rising interest rates in Japan.

The S&P Arbitrage Index gained 1.24% in February led higher by the performance of all three of its underlying strategies, particularly convertible arbitrage. According to Dew, the convertible market is much improved in 2006 as overall “cheapness” is becoming more evident. S&P says that fund managers maintain that this “cheapness” is resulting in a better than average environment, and are therefore positioned accordingly. Better terms for holders to convert early and new issues carrying higher coupons are boding well for the convertible bond market.

“In the market neutral sector, strong performance from fundamental and estimate revision factors in February worked well despite a belief in the market that their day in the sun is over,” S&P said. “Growth factors continue to outperform value with classic mean reversion models profiting as well, causing some managers to thank asset outflows in this sector for widening spreads and increasing opportunities.”

Fixed income arbitrage managers witnessed mostly flat returns on the month as a general lack of movement in the markets they trade in offered little opportunity, S&P observed.

Also, the S&P Event-Driven Index advanced 0.65% in February, as all three of its underlying strategies ended the month in positive territory. “The distressed sector performed well in February, following its typical January rally, exemplifying a trend that has emerged within High Yield during recent years. Positions in a number of power and cable companies performed well as restructuring plans were announced and subsidiaries were sold,” it explained. “The Special Situations sector performed well during February as managers took advantage of a number of spinoffs and restructurings in Europe.”

“The merger arbitrage space continued to perform well with a number of larger deals coming to fruition including Cisco’s acquisition of Scientific Atlanta,” it noted. “The European market flourished as a number of deals were either announced or closed including E.ON AG’s over-bid for Endesa SA, toping an earlier bid by fellow Spanish utility Gas Natural.”

The S&P Directional/Tactical Index gained 0.53% in February. The firm noted that this performance was almost entirely due to, “a strong showing in the Macro sector as some managers experienced gains in numerous instruments including fixed income, currencies, equities and commodities.”

“Despite choppy equity markets some managers were able to grind out gains via short positions while others closed out the month on a high note, profiting in positions in corn and copper,” it added.

“In the Managed Futures sector, short-term models were particularly adept at trading the choppy equity markets resulting in gains from managers focused on short-term trends. Short positions in the Yen were unsuccessful in February as that currency bounced around a bit towards the end of the month. Long positions in Coffee suffered as that market reversed a long-term bull trend,” S&P concluded.