The Journal of Financial Economics recently published a paper by Andrew Ang, Chair, Ann F. Kaplan Professor of Business and Chair, Finance and Economics Division at Columbia Business School; Sergiy Gorovyy, PhD candidate, Columbia Business School; and Gregory B. van Inwegen, Head of Quantitative Research/Managing Director for Tailored Portfolio Group of Citi Private Bank, that was the first paper to formally investigate hedge fund leverage using actual hedge fund ratios.
Contrary to popular belief, the researchers found that hedge funds, in general, are only modestly leveraged. The average hedge fund leverages its equity by two times. In addition, hedge fund leverage is counter–cyclical to the leverage of the finance sector and large financial intermediaries. During the financial crisis, the leverage of investment banks spiked up to above 40 during the first quarter of 2009. During that time, the average hedge fund leverage was only 1.4, and hedge funds had started to substantially reduce their leverage in 2007 long before the onset of the financial crisis.
The relatively frequent and sophisticated use of leverage is a defining characteristic of the hedge fund industry. Yet, little is known about hedge fund leverage. Hedge funds are not required to report their activities to the same extent as mutual funds, pension funds, banks, insurance companies, and other financial institutions. In order to explore hedge fund leverage, the researchers studied actual leverage ratios of hedge funds—the first study to obtain such information—for a large cross section of funds. They studied both how hedge fund leverage has evolved over time for the whole hedge fund industry and various hedge fund sectors and the determinants of hedge fund leverage across funds, that is what makes one fund take different leverage from another fund. Finally, they compared hedge fund leverage to the leverage of listed financial companies.
The study revealed hedge fund leverage decreased prior to the start of the financial crisis in mid–2007. At the same point in time, the leverage of investment banks continued to increase. Furthermore, during the worst periods of the financial crisis in 2008, hedge fund leverage was at its lowest while the leverage of investment banks was at its highest. The researchers discuss two possibilities for the early reduction in leverage by hedge funds: a voluntary reduction in leverage because hedge fund managers, on average, had skill, or that the reduction in leverage was involuntary and was forced upon hedge funds by prime brokers, who provide hedge funds with the ability to leverage. Given that many prime brokers are run by investment banks which increased leverage in 2007 and performed extremely badly over 2008–9, the first explanation is more likely. In addition, the researchers found that changes in hedge fund leverage tend to be more predictable by economy–wide factors than by fund–specific characteristics. In particular, decreases in funding costs and increases in market values forecast increases in hedge fund leverage, and decreases in fund return volatilities predict future increases in leverage.
These findings will be influential, as the research indicates hedge funds are unlikely to represent a large source of systemic risk. An important implication is that regulators should be more concerned with the traditional regulated finance sector, especially banks and large financial institutions which provide hedge funds with leverage, rather than hedge funds themselves.
Thursday, July 28, 2011
Wednesday, July 20, 2011
Hedge Funds Outperform Equity Benchmarks in Turbulent Markets
Hedge funds as measured by the Greenwich Global Hedge Fund Index (“GGHFI”) navigated volatile markets to finish the month with a slight loss. The GGHFI shed 1.32% compared to global equity returns in the S&P 500 Total Return (-1.67%), MSCI World Equity (-1.73%), and FTSE 100 (-0.74%) equity indices. 28% of constituent funds in the GGHFI ended the month with gains.
“Market Neutral and Long-Short Equity funds both outperformed broad equity market indices for the month,” notes Clint Binkley, Senior Vice President. “Managers were fully occupied in negotiating the risk trade as investor sentiment changed dramatically over the course of the month. We continue to believe that in volatile markets actively managed hedge fund portfolios will provide superior results to index investing.”
Hedge Fund Strategy Highlights
Short-Biased and Fixed Income Arbitrage Funds post positive results for the month
Long-Short Equity managers decline 1.06%, less than equity benchmarks
Managed Futures funds slide 2.39% on intra-month selloff in equities and commodities
Long-Short Credit and Fixed Income Arbitrage funds lead hedge funds on year-to-date basis, up 4.62% and 4.12%, respectively
Emerging market funds decline marginally more than Developed Market managers; US/Canada funds are clear winners for the year, up nearly 3%
Strategy Group Summary
June Return
YTD Return
Greenwich Global Hedge Fund Index
-1.32%
0.42%
Market Neutral Group
-0.80%
1.72%
Equity Market Neutral
-0.90%
-0.15%
Event Driven
-1.18%
2.41%
Distressed Securities
-0.55%
3.22%
Merger Arbitrage
-0.14%
2.62%
Several Strategies
-2.05%
1.37%
Arbitrage
-0.28%
1.51%
Convertible Arbitrage
-0.69%
1.95%
Fixed Income Arbitrage
0.12%
4.12%
Other Arbitrage
-1.18%
-2.07%
Long-Short Equity Group
-1.06%
1.06%
Growth
-1.49%
1.25%
Opportunistic
-1.02%
0.47%
Short-Biased
3.65%
0.08%
Value
-1.01%
1.30%
Directional Trading Group
-2.04%
-2.59%
Futures
-2.39%
-3.16%
Macro
-1.08%
-1.26%
Specialty Strategies Group
-1.17%
1.62%
Long-Short Credit
-0.29%
4.62%
Multi-Strategy
-1.70%
-0.28%
Greenwich Regional Hedge Fund Indices
June Return
YTD Return
Developed Markets Composite
-1.25%
0.60%
Global
-1.65%
-0.83%
Asia
-0.18%
-0.84%
Europe
-1.04%
-0.19%
North America
-0.92%
2.86%
Emerging Markets Composite
-1.43%
-0.92%
Emerging Markets Global
-1.26%
0.96%
Emerging Markets Asia
-1.68%
-2.71%
Emerging Markets Europe
-1.41%
-0.25%
Emerging Markets Latin America/SA
-0.93%
0.07%
“Market Neutral and Long-Short Equity funds both outperformed broad equity market indices for the month,” notes Clint Binkley, Senior Vice President. “Managers were fully occupied in negotiating the risk trade as investor sentiment changed dramatically over the course of the month. We continue to believe that in volatile markets actively managed hedge fund portfolios will provide superior results to index investing.”
Hedge Fund Strategy Highlights
Short-Biased and Fixed Income Arbitrage Funds post positive results for the month
Long-Short Equity managers decline 1.06%, less than equity benchmarks
Managed Futures funds slide 2.39% on intra-month selloff in equities and commodities
Long-Short Credit and Fixed Income Arbitrage funds lead hedge funds on year-to-date basis, up 4.62% and 4.12%, respectively
Emerging market funds decline marginally more than Developed Market managers; US/Canada funds are clear winners for the year, up nearly 3%
Strategy Group Summary
June Return
YTD Return
Greenwich Global Hedge Fund Index
-1.32%
0.42%
Market Neutral Group
-0.80%
1.72%
Equity Market Neutral
-0.90%
-0.15%
Event Driven
-1.18%
2.41%
Distressed Securities
-0.55%
3.22%
Merger Arbitrage
-0.14%
2.62%
Several Strategies
-2.05%
1.37%
Arbitrage
-0.28%
1.51%
Convertible Arbitrage
-0.69%
1.95%
Fixed Income Arbitrage
0.12%
4.12%
Other Arbitrage
-1.18%
-2.07%
Long-Short Equity Group
-1.06%
1.06%
Growth
-1.49%
1.25%
Opportunistic
-1.02%
0.47%
Short-Biased
3.65%
0.08%
Value
-1.01%
1.30%
Directional Trading Group
-2.04%
-2.59%
Futures
-2.39%
-3.16%
Macro
-1.08%
-1.26%
Specialty Strategies Group
-1.17%
1.62%
Long-Short Credit
-0.29%
4.62%
Multi-Strategy
-1.70%
-0.28%
Greenwich Regional Hedge Fund Indices
June Return
YTD Return
Developed Markets Composite
-1.25%
0.60%
Global
-1.65%
-0.83%
Asia
-0.18%
-0.84%
Europe
-1.04%
-0.19%
North America
-0.92%
2.86%
Emerging Markets Composite
-1.43%
-0.92%
Emerging Markets Global
-1.26%
0.96%
Emerging Markets Asia
-1.68%
-2.71%
Emerging Markets Europe
-1.41%
-0.25%
Emerging Markets Latin America/SA
-0.93%
0.07%
Monday, July 11, 2011
HFN Industry Report: May 2011
Click here to read the full report.
HFN Industry Overview: May 2011
On June 21, 2011 with 3,255 hedge fund products reporting, the HFN Hedge Fund Aggregate Index was -1.06% in May and +1.62% YTD 2011 while the S&P 500 Total Return Index (S&P) was -1.13% during the month and +7.82% YTD.
Hedge Fund Industry May Highlights:
•Total industry assets fell an estimated 0.79% to $2.586 trillion in May. Performance accounted for the majority of the asset decrease and net investor allocations were positive for the eleventh consecutive month.
•Many performance drivers in April reversed in May with losses manifest in CTA/managed futures strategies along with energy and technology equity focused funds.
•Credit strategies generally outperformed the rest of the industry, led again by mortgage funds, but gains were also available in certain EM interest rate markets and short European sovereign debt.
•Japan focused funds were down for the third straight month and have lost an average of nearly 5% since the earthquake in March.
The sharp turnaround of the U.S. dollar and the slide in commodity prices were the most evident indicators of a global reduction of exposure to risk assets during the month. Despite the aggregate equity market slide there were pockets of strong returns for hedge funds in the healthcare sector as well as positive performance, albeit slight, for small/micro cap related strategies. Mortgage funds continued to produce positive returns and along with healthcare funds are the only strategy/sector groups to have outperformed the S&P in 2011.
HFN developed the Outlier ratio to determine which sectors are producing returns outside of their normal ranges. In May, it was tech sector, CTA/managed futures and global macro strategies producing abnormally negative aggregate returns.
HFN Regional Benchmarks
Emerging market equities related returns, primarily Russia and India focused strategies, were the largest drag on aggregate EM returns in May. While all emerging market regional exposure produced negative average returns, EM debt strategies were positive for the month. The HFN Emerging Markets Index is barely positive for the year, +0.12%, its lowest level through the first five months of a year since 2008 and second lowest since the Russian financial crisis of 1998.
Australia focused funds declined more than any other developed market in May, falling -2.28% during the month. The group appeared to have ridden the rising commodity price wave through late 2010, but suffered during the sell off in May. The group has outperformed the ASX Index, even in months when the index has risen, but losses in May mirrored the ASX decline.
Monthly Asset Flow Estimates
•Total estimated hedge fund assets at the end of May 2011 were $2.586 trillion, a decrease of 0.79%, or $20.5 billion from April.
•Performance accounted for a decrease of $31.9 billion and investors accounted for a net inflow of $11.4 billion.
•The core rate of growth (% asset change due to investor allocations/redemptions) was 0.44%, a decrease from April and only slightly above the prior twelve month average.
•Total hedge fund AUM is now 14% below the all-time high set in Q2 2008.
Net investor flow information continues to indicate strong interest for investing directly into hedge funds, a trend which has persisted for several months. Despite the declining core rate of growth, May inflows showed the eleventh straight month of net allocations. The monthly total asset decline was only the fourth since April 2009, the last month of massive redemptions outpacing inflows following the crisis.
Sub-Sector Specific Flows
•Investors appear to believe there is profitability investing in Japanese markets. Net investor flows into Japan focused hedge funds have been above the industry average in the last two months.
•Commodity focused funds led inflows by investment market in May followed by four classifications of debt. Flows into mortgage, convertibles, sovereign and corporate bond funds outpaced equity fund flows.
•Funds investing primarily in European markets have had notable swings in investor interest. In April inflows jumped, but in May more money left than was allocated, which had been the trend for several months prior to April.
•Money continued to flow into techonology sector funds, despite the aggregate outsized losses during the month. Healthcare strategies also saw a blip of positive money flows.
Performance Review
Fixed Income (FI) Strategies
•The average return of all fixed income focused strategies was +0.43% in May and +3.64% year-to-date.
•Mortgage funds performed best in May, +1.52% while distressed strategies posted slight declines, -0.23%.
•Fixed income fund assets rose 1.17% in May to an estimated $693.1 billion. Investors added net $5.1 billion during the month.
Equity (EQ) Strategies
•The average return of all equity focused strategies was -0.84% in May and +1.15% YTD.
•Funds investing in healthcare sector equities had the best returns, +1.54%, followed by those investing in small/micro cap issues, +0.29%. Energy sector funds had the most difficult month, -2.43%.
•Equity fund assets fell an estimated 0.71% to $852.5 billion in May. Investors allocated a net $1.9 billion; a decline from April and below the prior twelve month average.
Commodity and Foreign Exchange (FX) Related Strategies
•Broad natural resource commodity strategies were -3.28% in May and -0.16% YTD.
•Funds investing in FX markets gave back most of April’s gains, -2.45% and are now -1.01% for the year.
•Only agriculture funds had aggregate gains in May, +1.51% and funds investing in metals markets fell most, -3.53%.
Summary Analysis
While money flows into hedge funds have continued at an above average pace, the influx of capital may be a vote to the lack of confidence in direct investment in traditional markets. The vast majority of equity markets are in negative territory in June, the Greek debt crisis has European credit markets sitting at a point of flux and commodity prices are mixed with energy prices continuing their fall. These factors point to another difficult month for aggregate hedge fund returns, however it may be a second straight month when the industry outperforms broad equity markets.
Click here to read the full report.
The Dow Jones Credit Suisse Core Hedge Fund Index Down 1.95% in June
Oliver Schupp, President of Credit Suisse Index Co., LLC, said, “Headlines over Eurozone debt concerns dominated markets and set the tone for a second consecutive negative month of hedge fund performance in June. Overall, the Dow Jones Credit Suisse Core Hedge Fund Index lost 1.95% for the month.” Mr. Schupp continued, “A lack of fundamentally driven trends hurt many managers, with Global Macro experiencing the most significant decline, falling 3.12%.
Fixed Income Arbitrage was the month’s only bright spot. The sector gained 0.20% as managers benefited from increased interest rate volatility and widening swap spreads. The strategy remains up 2.38% year-to-date.” The Dow Jones Credit Suisse Core Hedge Fund Index provides the benefit of daily valuations which enables investors to more accurately track the impact of market events on the hedge fund industry. June, May and 2011 year-to-date performance is listed below and available at www.hedgeindex.com.
Index Jun 11 May 11 2011 YTD
Dow Jones Credit Suisse Core Hedge Fund Index -1.95% -1.71% -1.10%
Convertible Arbitrage -1.45% -0.65% 0.42%
Emerging Markets -0.11% -0.97% 2.38%
Event Driven -2.69% -1.29% -1.71%
Fixed Income Arbitrage 0.20% -0.03% 2.38%
Global Macro -3.12% -2.52% -4.04%
Long/Short Equity -1.66% -1.58% 0.14%
Managed Futures -2.92% -4.40% -4.44%
About the Dow Jones Credit Suisse Core Hedge Fund Index
Following the market events of 2008, increased attention has been focused on liquid hedge fund structures, including managed accounts, which have the potential to offer more frequent liquidity and increased transparency. The Dow Jones Credit Suisse Core Hedge Fund Index is the first and only hedge fund index designed to reflect the performance of managed accounts and other regulated fund structures sourced from multiple best-in-class managed account platforms, creating an unparalleled view of the liquid, investable hedge fund universe.
Fixed Income Arbitrage was the month’s only bright spot. The sector gained 0.20% as managers benefited from increased interest rate volatility and widening swap spreads. The strategy remains up 2.38% year-to-date.” The Dow Jones Credit Suisse Core Hedge Fund Index provides the benefit of daily valuations which enables investors to more accurately track the impact of market events on the hedge fund industry. June, May and 2011 year-to-date performance is listed below and available at www.hedgeindex.com.
Index Jun 11 May 11 2011 YTD
Dow Jones Credit Suisse Core Hedge Fund Index -1.95% -1.71% -1.10%
Convertible Arbitrage -1.45% -0.65% 0.42%
Emerging Markets -0.11% -0.97% 2.38%
Event Driven -2.69% -1.29% -1.71%
Fixed Income Arbitrage 0.20% -0.03% 2.38%
Global Macro -3.12% -2.52% -4.04%
Long/Short Equity -1.66% -1.58% 0.14%
Managed Futures -2.92% -4.40% -4.44%
About the Dow Jones Credit Suisse Core Hedge Fund Index
Following the market events of 2008, increased attention has been focused on liquid hedge fund structures, including managed accounts, which have the potential to offer more frequent liquidity and increased transparency. The Dow Jones Credit Suisse Core Hedge Fund Index is the first and only hedge fund index designed to reflect the performance of managed accounts and other regulated fund structures sourced from multiple best-in-class managed account platforms, creating an unparalleled view of the liquid, investable hedge fund universe.
Hennessee : HEDGE FUNDS DECLINE -1.20% IN JUNE
Hennessee Group LLC, an adviser to hedge fund investors, announced today that the Hennessee Hedge Fund Index declined -1.20% in June (+1.45% YTD), while the S&P 500 declined -1.83% (+5.01% YTD), the Dow Jones Industrial Average fell -1.24% (+7.23% YTD), and the NASDAQ Composite Index decreased -2.18% (+4.55% YTD). Bonds also fell, as the Barclays Aggregate Bond Index declined -0.29% (+2.74% YTD) and the Barclays High Yield Credit Bond Index decreased -0.97% (+4.98% YTD).
“Hedge funds experienced another difficult month in June. Hedge funds were ‘whipsawed’ as markets sold off sharply before dramatically reversing course with a strong five day rally into quarter end,” commented Lee Hennessee, Managing Principal of Hennessee Group. “As the markets fell, hedge funds reduced exposures in order to limit losses and protect capital. When the markets rebounded, hedge funds failed to fully participate in the rally.”
“The ‘risk on, risk off’ theme continues to dominate risk assets, as stocks, currencies and commodities are moving in response to macro events. Concerns about the U.S. and Chinese economies, oil prices, and sovereign debt issues in Greece are driving markets and creating a difficult investment environment,” commented Charles Gradante, Co-Founder of Hennessee Group. “This year has been extremely challenging for hedge funds. Thus far this year, hedge funds are underperforming as they attempt to manage volatility and protect capital against losses.”
The U.S. equity markets finished the month with modest declines, as the S&P 500 posted a -1.83% loss. However, the loss was significantly diminished by a late month rally as Greece was able to avoid default. Large cap stocks outperformed small- and mid-cap stocks, while growth continued to outperform value. During the month, all the S&P 500 sectors were negative for the month with Financials (-2.92%), Information Technology (-2.64%) and Consumer Staples (-2.85%) declining the most.
The Hennessee Long/Short Equity Index declined -1.08% (+2.63%) in June, its worst month since August 2010. Hedge funds were “whipsawed” as the markets declined -5% before reversing course in the last five trading days of the month. Hedge funds reduced gross and net exposures in order to protect capital. The lower exposure levels prevented hedge funds from bouncing back as much as equity markets during the late month rally. Managers expressed some concern about low trading volume going into quarter end. In addition, managers express frustration shorting as several momentum names with poor fundamentals continue to advance in a declining market, detracting from performance.
Managers are looking to July for a better investment environment as second quarter earnings are reported, which should hopefully reward stock pickers. Most expect operating earnings to post a healthy increase over second quarter 2010 and first quarter 2011, but managers are more focused on forward guidance.
“The declining equity markets over the past two months have forced managers to become more defensive. They trimmed exposure levels and reduced leverage, consolidated into high conviction core positions, and raised cash,” commented Charles Gradante. “Most managers remain cautious. They are evaluating some key macro events, including how the U.S. will deal with the debt ceiling. While short term caution is prudent, they are increasingly optimistic if a deal gets made as we start to approach the Presidential election. Historically, it has been bullish for financial markets.”
The Hennessee Arbitrage/Event Driven Index declined -1.08% in June (+1.79% YTD). For the month, the Barclays High Yield Credit Bond Index fell -0.97% (+4.98% YTD), while the S&P/LSTA Leveraged Loan Index declined –0.65% (+1.95% YTD). Negative economic data and the debt crisis in Greece led to a 70 basis point widening of junk bonds yields after setting an all-time low in May. However, managers state that spreads of 580 basis points of Treasuries are still attractive as most expect high-yield bond and loan default rates to remain well below their long-term averages for the next few years.
The Hennessee Distressed Index decreased -1.21% in June (+4.41% YTD) as portfolios declined as markets sold off.
The Hennessee Merger Arbitrage Index declined –0.72% in June (+2.64% YTD). Deal spreads widened slightly as volatility picked up and markets sold off. While deal activity has slowed over the past couple months, corporate fundamentals remain strong. Companies are generating strong profits, good cash flow, and have attractive balance sheets, which should lead to more M&A activity once confidence improves.
The Hennessee Convertible Arbitrage Index returned -0.87% (+2.94% YTD) in June. The U.S. convertible markets held up fairly well, especially higher quality names. Convertible managers were able to limit losses as equity shorts and increasing volatility were able to mostly offset price declines and rising interest rates.
“With the recent approval of austerity programs, Greece was able to access financing that should allow it to avoid default for a couple more years, providing a short term spark to global markets,” commented Charles Gradante. “However, without restructuring the debt, we are simply delaying the inevitable. The real interest rate on their debt exceeds the real growth rate of the economy. Under most scenarios, Greece will be unable to reduce debt levels or pay off its debt. In addition, the ECB is contracting monetary policy and raising rates when they should be expanding it given the issues in Spain, Italy and Greece. Sovereign debt issues are going to persist for several years and have the ability to have a profound impact.”
The Hennessee Global/Macro Index declined -1.58% in June (-1.63% YTD). Global markets continued to decline in June, with the MSCI All-Country World Index falling -1.5% in June (+3.0% YTD). European debt issues persisted as well as new concerns about global growth. Managers closely watched Greece as there was a key vote for austerity programs, which allowed them access to bailout funds and avoid a default. International hedge funds slightly outperformed due to conservative positioning, as the Hennessee International Index declined -1.31% (-0.28% YTD). The main factor behind emerging market performance was the concern that the global “soft patch” would spread to the emerging market economies. In June, the MSCI EM Index declined -1.9%, with China being one of the worst performers, down -4.5%. Hedge fund managers were down in line with benchmarks, as the Hennessee Emerging Markets Index fell -1.17% (-0.20% YTD).
The Hennessee Macro Index fell -1.46% for the month (-2.98% YTD). Macro managers continue to struggle as there have been few sustainable trends. Managers lost money as risk assets declined, especially commodities. The Dow Jones-UBS Commodity Index was down -6.62% (-4.24% YTD) in June. The three worst performers were wheat, cotton and crude oil, which were down -19.58%, -13.56%, and -11.65% respectively. Gold approached in highs in June, but sold off as investors took profits, ending the month with a -2% loss. Managers remain bullish on gold due to weak monetary policy and low interest rates. Currencies were also challenging as the euro strengthened despite concerns about a potential default in Greece.
“Hedge funds experienced another difficult month in June. Hedge funds were ‘whipsawed’ as markets sold off sharply before dramatically reversing course with a strong five day rally into quarter end,” commented Lee Hennessee, Managing Principal of Hennessee Group. “As the markets fell, hedge funds reduced exposures in order to limit losses and protect capital. When the markets rebounded, hedge funds failed to fully participate in the rally.”
“The ‘risk on, risk off’ theme continues to dominate risk assets, as stocks, currencies and commodities are moving in response to macro events. Concerns about the U.S. and Chinese economies, oil prices, and sovereign debt issues in Greece are driving markets and creating a difficult investment environment,” commented Charles Gradante, Co-Founder of Hennessee Group. “This year has been extremely challenging for hedge funds. Thus far this year, hedge funds are underperforming as they attempt to manage volatility and protect capital against losses.”
The U.S. equity markets finished the month with modest declines, as the S&P 500 posted a -1.83% loss. However, the loss was significantly diminished by a late month rally as Greece was able to avoid default. Large cap stocks outperformed small- and mid-cap stocks, while growth continued to outperform value. During the month, all the S&P 500 sectors were negative for the month with Financials (-2.92%), Information Technology (-2.64%) and Consumer Staples (-2.85%) declining the most.
The Hennessee Long/Short Equity Index declined -1.08% (+2.63%) in June, its worst month since August 2010. Hedge funds were “whipsawed” as the markets declined -5% before reversing course in the last five trading days of the month. Hedge funds reduced gross and net exposures in order to protect capital. The lower exposure levels prevented hedge funds from bouncing back as much as equity markets during the late month rally. Managers expressed some concern about low trading volume going into quarter end. In addition, managers express frustration shorting as several momentum names with poor fundamentals continue to advance in a declining market, detracting from performance.
Managers are looking to July for a better investment environment as second quarter earnings are reported, which should hopefully reward stock pickers. Most expect operating earnings to post a healthy increase over second quarter 2010 and first quarter 2011, but managers are more focused on forward guidance.
“The declining equity markets over the past two months have forced managers to become more defensive. They trimmed exposure levels and reduced leverage, consolidated into high conviction core positions, and raised cash,” commented Charles Gradante. “Most managers remain cautious. They are evaluating some key macro events, including how the U.S. will deal with the debt ceiling. While short term caution is prudent, they are increasingly optimistic if a deal gets made as we start to approach the Presidential election. Historically, it has been bullish for financial markets.”
The Hennessee Arbitrage/Event Driven Index declined -1.08% in June (+1.79% YTD). For the month, the Barclays High Yield Credit Bond Index fell -0.97% (+4.98% YTD), while the S&P/LSTA Leveraged Loan Index declined –0.65% (+1.95% YTD). Negative economic data and the debt crisis in Greece led to a 70 basis point widening of junk bonds yields after setting an all-time low in May. However, managers state that spreads of 580 basis points of Treasuries are still attractive as most expect high-yield bond and loan default rates to remain well below their long-term averages for the next few years.
The Hennessee Distressed Index decreased -1.21% in June (+4.41% YTD) as portfolios declined as markets sold off.
The Hennessee Merger Arbitrage Index declined –0.72% in June (+2.64% YTD). Deal spreads widened slightly as volatility picked up and markets sold off. While deal activity has slowed over the past couple months, corporate fundamentals remain strong. Companies are generating strong profits, good cash flow, and have attractive balance sheets, which should lead to more M&A activity once confidence improves.
The Hennessee Convertible Arbitrage Index returned -0.87% (+2.94% YTD) in June. The U.S. convertible markets held up fairly well, especially higher quality names. Convertible managers were able to limit losses as equity shorts and increasing volatility were able to mostly offset price declines and rising interest rates.
“With the recent approval of austerity programs, Greece was able to access financing that should allow it to avoid default for a couple more years, providing a short term spark to global markets,” commented Charles Gradante. “However, without restructuring the debt, we are simply delaying the inevitable. The real interest rate on their debt exceeds the real growth rate of the economy. Under most scenarios, Greece will be unable to reduce debt levels or pay off its debt. In addition, the ECB is contracting monetary policy and raising rates when they should be expanding it given the issues in Spain, Italy and Greece. Sovereign debt issues are going to persist for several years and have the ability to have a profound impact.”
The Hennessee Global/Macro Index declined -1.58% in June (-1.63% YTD). Global markets continued to decline in June, with the MSCI All-Country World Index falling -1.5% in June (+3.0% YTD). European debt issues persisted as well as new concerns about global growth. Managers closely watched Greece as there was a key vote for austerity programs, which allowed them access to bailout funds and avoid a default. International hedge funds slightly outperformed due to conservative positioning, as the Hennessee International Index declined -1.31% (-0.28% YTD). The main factor behind emerging market performance was the concern that the global “soft patch” would spread to the emerging market economies. In June, the MSCI EM Index declined -1.9%, with China being one of the worst performers, down -4.5%. Hedge fund managers were down in line with benchmarks, as the Hennessee Emerging Markets Index fell -1.17% (-0.20% YTD).
The Hennessee Macro Index fell -1.46% for the month (-2.98% YTD). Macro managers continue to struggle as there have been few sustainable trends. Managers lost money as risk assets declined, especially commodities. The Dow Jones-UBS Commodity Index was down -6.62% (-4.24% YTD) in June. The three worst performers were wheat, cotton and crude oil, which were down -19.58%, -13.56%, and -11.65% respectively. Gold approached in highs in June, but sold off as investors took profits, ending the month with a -2% loss. Managers remain bullish on gold due to weak monetary policy and low interest rates. Currencies were also challenging as the euro strengthened despite concerns about a potential default in Greece.
Bloomberg: Hedge funds fell 0.2 percent in June
Hedge funds fell 0.2 percent in June as stocks slumped amid rising concern Greece would default on its debt and evidence the global economy was slowing.
The Bloomberg aggregate hedge-fund index declined to 125.92 from 126.20 in May, trimming this year's gain to 4.4 percent. Long-short equity funds, multistrategy funds and macro funds, which bet on global economic trends, declined.
Macro funds declined 0.5 percent in June and rose 1.2 percent in the year's first half. Long-short equity funds, whose managers can bet on rising and falling stocks, dropped 0.1 percent last month and gained 5.6 percent this year.
The main Bloomberg hedge-fund index is weighted by market capitalization and tracks 2,708 funds, 1,326 of which have reported returns for June.
The Bloomberg aggregate hedge-fund index declined to 125.92 from 126.20 in May, trimming this year's gain to 4.4 percent. Long-short equity funds, multistrategy funds and macro funds, which bet on global economic trends, declined.
Macro funds declined 0.5 percent in June and rose 1.2 percent in the year's first half. Long-short equity funds, whose managers can bet on rising and falling stocks, dropped 0.1 percent last month and gained 5.6 percent this year.
The main Bloomberg hedge-fund index is weighted by market capitalization and tracks 2,708 funds, 1,326 of which have reported returns for June.
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