Hedge fund returns, as measured by the Standard & Poor’s Hedge Fund Index (S&P HFI), rose 1.16% in March — its third consecutive month of positive performance. Year-to-date, the index is up 4.03%.
“Many hedge fund strategies saw strong returns during the first quarter,” says Charles Davidson, Senior Hedge Fund Specialist at Standard & Poor’s. “Strong trends across a number of asset classes, low market volatility, and an increase in global M&A activity are among the key return drivers so far this year.”
The S&P Arbitrage Index gained 1.60% in March with its three underlying strategies (Equity Market Neutral, Fixed Income Arbitrage and Convertible Arbitrage) all ending in positive territory. Convertible Arbitrage managers, despite the closure of several high profile funds last year and a substantial shift in assets away from the strategy, saw stronger pricing during the quarter.
Also in this space, Standard & Poor’s is seeing greater interest from equity managers looking for downside protection in a market, some believe, is a bit overextended.
The S&P Event-Driven Index gained 1.40% during March as the availability of capital at low rates as well as large pools of unallocated private equity funds have combined to create a favorable environment for merger and buyout activity. With private equity and hedge funds competing against one another in the space, deal sizes increased, helping to raise the multiples on several potential takeover targets.
Despite a good start to the year, many event-driven managers remain cautious, expressing concern with the increasing size and deal multiples at which transactions are taking place. “There is a good amount of speculation within the markets on takeover targets not correlating to the fundamentals of the corporations initiating the takeover,” says Davidson. “This is on top of an equity market that many think is overextended and due for a correction.”
The S&P Directional/Tactical Index gained 0.47% during March with strong gains seen in the Equity Long/Short and Managed Futures strategies. Macro managers struggled with returns last month as fundamental data continues to be mixed. Hedge fund gains came on the outperformance of smallcap and midcap holdings where those taking long positions tend to concentrate. Overweighted exposure to energy, materials, telecommunications and industrials drove much of the returns in March, as they have for the past few months.
Managed Futures managers, with their largely medium- to long-term trend following systems, continue to gain on strong trends in equities and commodities. The S&P Managed Futures Index was up 3.95% for the month. Macro managers have neither gained nor lost much during the quarter as currency, which is a major asset class for most, has been trading in a wide range negating gains in areas such as equity indices and commodities.