New York, July 8, 2005-
Hedge fund returns as measured by the S&P Hedge Fund Index (S&P HFI) gained 0.90% during the month of June, finishing the first half of the year up 0.13%, Standard & Poor''s announced today. All three of the S&P HFI''s sub-indices rose during the month of June, contributing to the first half positive return for the index.
"Managers have become less risk averse due to a combination of more predictable monetary policy and contained inflation," says Charles Davidson, Senior Hedge Fund Specialist at Standard & Poor''s. "This has encouraged greater confidence in asset allocations toward higher yielding risk assets and increased leverage to generate target returns. With the end of quarter redemption cycle behind them, managers are shifting focus from liquidity management to security selection with the objective of finishing the year on a high note."
The S&P Directional/Tactical Index gained 1.62% in June as global equity markets rose during the month. Equity Long/Short managers benefited from a net long exposure as reflected by gains of 1.82% and 1.92%, respectively, in the S&P ELSI US and S&P ELSI Global ex-US sub-indices. Macro managers had a mixed month as short-term technical trading rather than fundamental trading had a larger influence on profitability. The S&P Managed Futures Index rose by 1.86% for the month of June as major profits were made on long positions in the U.S. dollar, bonds, crude oil, equity indices and grains. Metals such as gold and nickel, both of which reversed strong upward trends late in the month, contributed to losses. Copper, however, continued to be profitable as it rose on tight inventories.
The S&P Arbitrage Index gained 0.24% in June led upward by the performance of Convertible Arbitrage, which has had a difficult time coping with investor redemption selling, low volatility, tight credit spreads and low issuance. With capital being removed from the strategy due to redemptions and the closure of several large funds, prices have firmed, albeit on limited liquidity. With the next major redemption window not coming until year-end, managers are using their relatively stable capital base to search for values among the many historically cheap securities. Fixed Income Arbitrage returns were mixed in June as some managers continued to profit from U.S. yield curve flattening trades, while others experienced losses as they were forced to cover short bond positions. European bonds in particular rallied on a surprise 50bps interest rate cut by Sweden''s central bank. Mortgage managers gained on lower coupon bonds and basis trading.
The S&P Event-Driven Index gained 0.85% in June as its three underlying strategies all ended the month in positive territory. Merger Arbitrage turned in a strong month despite spread widening due to the popular Johnson & Johnson-Guidant deal. Stabilization of the high yield market and credit spreads, after the spike around the GM downgrade, positively impacted Special Situations and Distressed strategies during the month. However, several managers noted that their space has become more difficult due to a number of factors, including the reduction in debt issuance as companies develop cash reserves and paydown existing debt. Managers also noted that finding attractively priced securities, when forced to bid against other funds in an environment of cheap funding, is making life more difficult.