After a positive February, hedge fund performance as measured by the S&P Hedge Fund Index (S&P HFI), finished March down 0.55% on an indicative basis to produce a negative year-to-date return of -0.20% for the index, Standard & Poor’s announced today. Contributing to the underperformance in March were the negative returns registered by the S&P Directional/Tactical Index (-0.86%), the S&P Arbitrage Index (-0.52%) and the S&P Event-Driven Index (-0.28%).
Within the S&P Directional/Tactical Index, Equity Long/Short managers experienced the largest losses in March. Uncertainty with regard to the actions of the Federal Reserve, interest rates in general, and uneasiness about inflation and increasing energy prices led the S&P Equity Long/Short Index down 1.32% during the month. The S&P Managed Futures Index, comprising 14 predominantly medium- to long-term trend followers, ended the month in slightly positive territory, up 0.29%.
“Performance was mixed in Managed Futures as some managers experienced gains in metal and energy positions, while others were flat in fixed income and experienced losses in currencies,” says Justin Dew, senior hedge fund specialist at Standard & Poor’s. “Weaker than expected economic data in both Europe and Japan drove these currencies lower versus the U.S. dollar, while rising interest rate expectations in the U.S. propelled the dollar higher.”
The S&P Arbitrage Index lost 0.52% during March, bringing its year-to-date return to 0.08%. Equity Market Neutral was the only sector in the index to register gains for March. “March was another strong month for the Market Neutral sector as mean reversion models performed particularly well,” said Dew. “Volatility, as measured by the CBOE Volatility Index, also bounced off lows in February climbing into the 13% range, benefiting many Market Neutral strategies.”
In the Convertible Arbitrage sector, a convergence of factors drove losses during the first quarter and in March. “The additive effects of ongoing, relatively low market volatility coupled with a widening credit spread environment, selling activity from fund redemptions and proprietary trading desk positions, resulted in a particularly difficult trading environment in March,” adds Dew. “In the Fixed Income Arbitrage sector, mortgages (MBS) were a particularly difficult instrument to be invested in as managers, who were long the basis or short the volatility, experienced losses.”
The S&P Event-Driven Index lost 0.28% for the month as Special Situations managers experienced difficulty with restructuring catalyst-driven value equities. These positions underperformed due in part to the effects of rising interest rates and a declining equity market. This is a departure from the normally uncorrelated nature of Special Situations to equities. While the Distressed sector has added to the returns of the S&P HFI on the quarter, performance diminished in March as credit spreads widened by a significant 54.9 basis points between March 8th and March 31st. Merger Arbitrage returns for the month were positive as a few substantial deals came closer to fruition.