Managed Futures and Credit Hedge Funds Start 2H 2012 with a Strong July

Hedge funds reporting July performance show a median return of +0.7% versus +1.4% for the S&P 500 Total Return. YTD, hedge funds are +3.1% vs. +11.0% for the S&P 500 TR. The industry's performance in July was most positively influenced by managed futures strategies which benefited not only from the return of trending USD strength, but from many which appeared well positioned to benefit from the drought induced spike in grain prices. Credit strategies produced their best month since January and have produced aggregate returns greater than 2x that of equity strategies in 2012.

• Hedge funds reporting July performance show a median return of +0.7%, in-line with regression estimates of +0.8%, versus +1.4% for the S&P 500 TR. YTD, hedge funds are +3.1% vs. +11.0% for the S&P.

• The HFN Hedge Fund Aggregate Index was +0.6% and +1.8% through July in 2011 and 2010, respectively, before finishing those years -5.0% and +10.6%.

• The Eurozone’s continuous state of flux along with poor U.S. jobs data and its impact on monetary policy expectations continued to influence global markets in July. Unlike June when multiple macro events pushed equities broadly higher, much of July’s news was negative until the ECB president’s comments on the 25th provided a questionable basis for a positive reversal.

• The industry’s performance in July was most positively influenced by managed futures strategies which benefited not only from the return of trending USD strength, but from many which appeared well positioned to benefit from the drought induced spike in grain prices.

• Prior to the month-end rally, July was challenging for directional equity strategies and those with a long bias lagged significantly. Credit strategies produced their best month since January and have produced aggregate returns greater than 2x that of equity strategies in 2012.

• Through June, hedge fund assets have fallen for four consecutive months to $2.5 trillion, a decline of $20.8 billion in June and $53.4 billion in Q2. Net outflows occurred in 8 of the last 12 months, during which $28 billion has been taken out of the industry. Redemptions from FoFs appear to be the outflows’ primary driver, offsetting what is likely healthy direct investment.

• In reaction to the theme of difficult to predict, macro driven markets, investor flows were weak across the board in June, particularly for event driven equity and emerging markets. In Q2, credit and macro strategies were two of the few sectors receiving net inflows.

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