Hedge funds gain amid weak equity markets - 05/15/02

In a month when the big market indices fall, eight out of ten hedge fund sectors posted gains during April, according to CSFB/Tremont's hedge fund performance figures released on Wednesday.

The S&P 500 fell 6.14 per cent and the Nasdaq tumbled 8.51 per cent during the month, while overall hedge funds rose by 0.79 per cent in value.

Unsurprisingly in a poor equity market, the most successful hedge funds were the short sellers, who gained 2.05 per cent last month. The index categorises funds according to which strategy they use. Global macro funds, which take positions in currencies, stocks, bonds and commodities based on macro-economic trends, also performed well, posting a 1.7 per cent return. Least successful was the managed futures sector, whose trend-following members gave up 1.51 per cent.

Funds specialising in emerging markets have posted an average return of 10.03 per cent this year, continuing a strong run which began late last year and leaving them firmly in first place as the best performing group for the year so far.

Possibly the most dramatic comeback seems to be convertible bond arbitrage, which gained 1.21 per cent last month. CSFB/Tremont's convertible bond sector fell by 3 per cent after the Lipper Convertible funds announced a surprisingly heavy markdown in February. That fall and a smaller decline in March prompted a slew of investor calls to the index compilers.

At issue was not just the index methodology but also the question of whether the convertible cycle has turned. Convertible bond funds have enjoyed several years of very strong performance, gaining 14.6 per cent in 2001 and an impressive 25.6 per cent in 2000.

But hedge fund investors have become increasingly sceptical about investing in convertibles as equity index volatility has declined and corporate credit has deteriorated. Convertibles are corporate bonds with embedded equity call options, so credit and volatility are two of the most important elements of their price.

Some sceptics argued that, even though the circumstances surrounding the Lipper meltdown appeared to have been highly unusual, the reduction in value of its portfolio was symptomatic of the decline in the market overall.

Supporters pointed out that other indices, including the Hennessee hedge fund index, showed convertibles performing positively, even while the CSFB/Tremont fell.