20 Jun 2011
May was a tough month for many in the hedge fund sector as sharp falls in market sentiment, ‘soft’ economic data in the US, and Chinese growth concerns all contributed to risk assets ‘reversing’.
Managed futures and global macro funds saw the steepest falls as short US dollar and long commodity positions weighed heavily on performance. Equity hedged returns also struggled towards the close of earnings season.
But there were pockets of good performance. Many pared losses with fixed income strategies benefitting from a general fall in sovereign yields, and volatility funds capitalising on market turbulence.
The market environment was challenging as concerns over a global economic slowdown sent equity markets lower and renewed sovereign debt worries weighed on returns. In particular, soft labour market data in the US, slowing growth in China and continued concern over Greece impacted investors’ risk appetite. Unsurprisingly the MSCI World Index fell -1.7%.
A flight to safety caused the US dollar to rise 2.1% while commodity-linked and emerging market currencies such as the rand, the Aussie dollar and the Canadian dollar notably weakened. Commodities also dropped on fears that future demand would be lower. The WTI crude oil index fell -10% while several precious and industrial metals saw severe price declines, with silver slumping -19.6%.
Managed futures managers were generally positioned for a ‘pro-risk’ environment with long stock, long commodity and short US dollar positions popular, but these themes were impacted by the strong sell off in commodities (S&P GSCI fell -9.3%), a pullback in equity prices, and a rebound in the US dollar (trade weighted US dollar index rose 1.3%).
Long fixed income positions posted strong returns, but not enough to offset losses elsewhere. Overall, the picture was disappointing with the Newedge CTA Index down -4.7%.
Global macro strategies also suffered with the HFRI Macro Index down -2.6 %. Many were caught with positions that had served them well in April, namely long positions in risk assets and short US dollar positions. Those that anticipated further Eurozone debt problems were rewarded for this view and were able to mitigate losses. Moving forward, many are taking a more cautious stance on future global growth.
Relative value managers and event-driven strategies fared better. The HFRI Relative Value Index was up 0.1% as heightened fears over sovereign debt contagion in Europe led investors into the safety of US treasuries. This played well for fixed income arbitrageurs positioned to benefit from a fall in sovereign yields.
Volatility managers also generally profited as the CBOE VIX Index started and closed around the 15 mark with intermittent spikes to around 18. Convertible arbitrageurs suffered however (HFRX Convertible Arbitrage Index down -0.4%) as the pull-back in risk appetite impacted convertible markets and new issuance was low.
The event-driven style, having experienced positive performance since August 2010, suffered as weak equity markets and widening deal spreads hit returns. Looking forward, managers are becoming increasingly interested in distressed opportunities in Europe although many question marks remain over where we are in the default cycle with countries like Greece. Certainly this theme has continued in June.
Equity hedged styles were broadly negative, but out-performed global equities. The HFRI Equity Hedge Index dropped -1.1% as investors switched their focus from micro/corporate to macro at the close of earnings season and risk appetite was sapped by uncertainty. Those that switched from pro-cyclical to defensive sectors such as Healthcare and Consumer Staples generated some gains, but looking forward, uncertainties around the ending of QE2 and future macro data will remain.
Managed futures and global macro funds saw the steepest falls as short US dollar and long commodity positions weighed heavily on performance. Equity hedged returns also struggled towards the close of earnings season.
But there were pockets of good performance. Many pared losses with fixed income strategies benefitting from a general fall in sovereign yields, and volatility funds capitalising on market turbulence.
The market environment was challenging as concerns over a global economic slowdown sent equity markets lower and renewed sovereign debt worries weighed on returns. In particular, soft labour market data in the US, slowing growth in China and continued concern over Greece impacted investors’ risk appetite. Unsurprisingly the MSCI World Index fell -1.7%.
A flight to safety caused the US dollar to rise 2.1% while commodity-linked and emerging market currencies such as the rand, the Aussie dollar and the Canadian dollar notably weakened. Commodities also dropped on fears that future demand would be lower. The WTI crude oil index fell -10% while several precious and industrial metals saw severe price declines, with silver slumping -19.6%.
Managed futures managers were generally positioned for a ‘pro-risk’ environment with long stock, long commodity and short US dollar positions popular, but these themes were impacted by the strong sell off in commodities (S&P GSCI fell -9.3%), a pullback in equity prices, and a rebound in the US dollar (trade weighted US dollar index rose 1.3%).
Long fixed income positions posted strong returns, but not enough to offset losses elsewhere. Overall, the picture was disappointing with the Newedge CTA Index down -4.7%.
Global macro strategies also suffered with the HFRI Macro Index down -2.6 %. Many were caught with positions that had served them well in April, namely long positions in risk assets and short US dollar positions. Those that anticipated further Eurozone debt problems were rewarded for this view and were able to mitigate losses. Moving forward, many are taking a more cautious stance on future global growth.
Relative value managers and event-driven strategies fared better. The HFRI Relative Value Index was up 0.1% as heightened fears over sovereign debt contagion in Europe led investors into the safety of US treasuries. This played well for fixed income arbitrageurs positioned to benefit from a fall in sovereign yields.
Volatility managers also generally profited as the CBOE VIX Index started and closed around the 15 mark with intermittent spikes to around 18. Convertible arbitrageurs suffered however (HFRX Convertible Arbitrage Index down -0.4%) as the pull-back in risk appetite impacted convertible markets and new issuance was low.
The event-driven style, having experienced positive performance since August 2010, suffered as weak equity markets and widening deal spreads hit returns. Looking forward, managers are becoming increasingly interested in distressed opportunities in Europe although many question marks remain over where we are in the default cycle with countries like Greece. Certainly this theme has continued in June.
Equity hedged styles were broadly negative, but out-performed global equities. The HFRI Equity Hedge Index dropped -1.1% as investors switched their focus from micro/corporate to macro at the close of earnings season and risk appetite was sapped by uncertainty. Those that switched from pro-cyclical to defensive sectors such as Healthcare and Consumer Staples generated some gains, but looking forward, uncertainties around the ending of QE2 and future macro data will remain.
