The EQUITIES Hedge Fund Index:
Hedge Fund Market Summary
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EQUITIES continues to expand its coverage of financial trends and important influencers on the public equities markets. Hedge funds have become a major player in the global financial markets. Since 1990, assets invested in hedge funds have grown from $8 billion to over $2.26 trillion (according to the HFN Hedge Fund Industry Administrator Survey).
Despite this, getting reliable information about these investment vehicles remains as difficult as ever. In response, EQUITIES has constructed an index comprised of 25 leading hedge funds. The result is the EQUITIES Hedge Fund Index. The inaugural report on the index is presented below.
Hedge Fund Market Summary
The stock markets posted their best month since December 2003, with the S&P rising 4.33% and the Dow Jones Industrials passing 13,000 for the first time. As is typical in strong months for the stock markets, hedge funds as a group lagged. Hedge funds don't rely on rising markets for their performance, and the strategies that enable them to gain when stocks are down also tend to level out performance in months such as April. Many hedge funds have no direct exposure to the stock market at all, and those that do mostly have short positions that hedge out much of the market risk.
Global macro managers benefited from gains in the global equity and fixed income markets. Profits were also taken in short positions in the dollar, as the US currency declined against most foreign currencies and in short positions in the oil markets, as crude pulled back. Macro managers have particularly profited this year from long positions in the metals and mining markets, as a global trend to consolidation continues among mining companies.
Although most long/short equity managers underperformed the stock market indexes in April, they are generally ahead of the market for the year due their sidestepping of the markets' losses earlier in the year. Most earnings announcements exceeded analysts' expectations by a good margin, driving stock prices higher. The healthcare and biotechnology sectors performed best, overcoming some of their underperformance in recent years. As mentioned above, mining companies were leading gainers. Established technology stocks moved higher on good earnings reports. Railroad stocks have suddenly become popular, after an announcement by Warren Buffett that he was purchasing three of these transportation stocks.
Among other hedge fund trading styles, distressed managers have added value to their portfolios by picking up some sub-prime mortgagebacked loans at considerable discounts. High yield managers saw their returns boosted by narrowing credit spreads, while high yield default rates remained close to record low levels. Convertible managers returned mixed results, as they struggled to deal with stock prices that rose faster than the related convertible issues. The considerable net new issuance of convertibles this year also cut secondary market values and dampened results in convertible portfolios. Merger arbitrage managers performed well, as merger activity continued at very strong levels.
1. EQUITIES Magazine is now launching the EQUITIES Hedge Fund Index. This chart and this graph show the historical perfo rmance of this basket of hedge funds on which our new index is based. It compares the performance to the S&P 500, and the Credit Suisse Tremont Hedge Fund Index since January 2005.
