Early estimates indicate the Credit Suisse/Tremont Hedge Fund Index (Broad Index) will finish up 0.48% in June (based on 66% of assets reporting).
Following Mays strong performance of 4.06%, June appeared to be a consolidation month for hedge funds with returns of 0.48%, with credit-oriented managers generally outperforming directional, event driven and tactical strategies. While returns were limited for certain strategies, many were able to retain profits gained earlier this year.
Government activism in the markets continued in Europe, as the European Central Bank provided 442 billion Euros to financial institutions at a rate of 1%. Many believe this could provide opportunities for credit-oriented hedge fund managers and to facilitate carry trades. In the US, the Fed continued its zero interest rate policy (ZIRP) as global macro data continued to be mixed. Generally, credit spreads improved over the month, and Relative Value managers had positive performance overall.
Convertible Arbitrage had its sixth straight month of positive performance and posted the best monthly performance of all the strategies in the Index with 4.0%, with some managers starting to profit from the volatility arbitrage aspect of the strategy as equity markets recovered from March lows. The strategy received more attention as a credit play earlier in the year, given the 4Q 08 devaluations many convertible bonds experienced.
Developed equity markets largely moved sideways for the month, although 2Q performance was the best since late 1998, with the S&P 500 gaining 15% for the quarter and Nasdaq gaining 20%. Junes sideways market movements allowed some of the defensively positioned Long/Short Equity managers to take profits on the month’s market dips, as opposed to the previous three months, when equity rallies allowed high-beta managers to make large gains. Sideways markets can benefit certain managers since there is usually less correlation among sectors, providing increased opportunities for tactical moves.
Emerging Markets experienced a -650 bps swing in returns from May to June, with a wide dispersion of returns for both regional equity indices as well as for managers. Russia’s Micex index was the notable outlier on the downside, dropping more than 20% from its 2009 peak, and became the first benchmark equity index to technically enter a bear market since global stocks began rallying in March. Nonetheless, the Micex was up 43% for the quarter, the Bombay Stock Exchanges benchmark Sensitive Index (Sensex) was up 49% on the quarter, while Brazils Bovespa was down 3.3% in June, but up 26% for the quarter. Overall, the Emerging Markets sector finished June relatively flat.
In the Event Driven space, some managers gave back a portion of the profits they made in May, but many believe opportunities continue to develop as credit delinquencies rise. Some Event Driven managers are adding exposure to Risk Arbitrage anticipating several deals that may close in 3Q-4Q.
L.D.