New York, June 6, 2005-
With the majority of gains arriving during the last week of the month, Standard & Poor''s reported today that the indicative S&P Hedge Fund Index (S&P HFI) rose 0.29% for the month of May. Standard & Poor''s analysis shows that hedge fund managers were able to capture a large portion of strong directional moves in global equity, bond and currency markets after experiencing small gains and losses for much of the month. In addition, a rising global equity market that shook off the effects of the May 5th GM/Ford rating downgrade and mixed economic data, helped hedge fund performance in May. The largest gains in the index occurred among Managed Futures and Equity Long/Short managers.
The S&P Directional/Tactical Index advanced 1.00% in May as two of its three underlying strategies, Managed Futures and Equity Long/Short registered impressive gains. Macro managers were flat to slightly down as the focus in the marketplace shifted from China and its revaluation to the European Union and France''s constitutional vote. "Some managers are becoming increasingly long U.S. dollar vs. euro in part on the continued difficulty in passing the constitution in France and the Netherlands," says Justin Dew, Senior Hedge Fund Specialist at Standard & Poor''s. The S&P Managed Futures Index gained 2.43% in May with the majority of this return coming at the end of the month with managers benefiting from a strong acceleration of the long USD/EUR trend. In addition, large gains were made in long financial futures positions as rates on the long end of the yield curve continued to decline.
"The long bias which hurt U.S. equity managers in April, was beneficial in May as it allowed for the capture of gains in the surging equity markets," says Dew. "The historically low net exposure of European funds, combined with profit taking earlier in the month, prevented European managers from seeing the same level of gains as found in the United States." Dew also notes that managers in Asia had a more difficult time as the Nikkei 225 dropped during the first half of the month before rising during the second. The net result, as indicated by the S&P Equity Long/Short Index, was a gain of 0.87% in May.
The S&P Arbitrage Index declined 0.22% during the month of May, led lower by losses in Convertible Arbitrage. Despite recent losses, some managers believe a bottom is near as valuations and slowing redemptions are making the strategy attractive again for many sophisticated investors. Volatility traders in this sector are continuing to have a difficult time as volatility (as represented by the VIX) has returned to low levels. Credit oriented convertible arbitrage trades rebounded from sizeable losses early in the month as credit spreads widened only to contract again towards month end.
The Equity Market Neutral strategy, which faced a situation similar to Convertible Arbitrage of low absolute returns and large outflows last year, continues to generate strong year-to-date alphas. In the Fixed Income Arbitrage sector, performance continues to rank highly among the best performing strategies through May with yield curve flattening trades a big contributor to its return. Some managers in this sector are taking a more cautious approach, utilizing catalysts to identify trades and reducing overall portfolio risk by reducing leverage.
The S&P Event-Driven Index gained 0.12% in May as managers benefited from a tightening of credits spreads in the U.S. market. Special Situations and Merger Arbitrage both showed strong correlations to the market, as rising equity markets typically increase the probability of a profitable exit strategy from positions. "Spin-offs/mergers and restructurings are more likely to happen as the economic environment improves in the U.S.," says Dew. "Some managers in this space are also see increasing opportunities in Europe as it appears likely that rate cuts will occur and private equity investment are on the rise. In the distressed sector, losses were experienced as spread volatility increased, and a number of equity and orphan equity positions underperformed."