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Volatile markets saw hedge funds struggle in June as few trends take hold

Wednesday, July 20, 2011
Opalesque Industry Update - Hedge funds continued to struggle in June as volatile market movements created a difficult trading environment. The Greek debt story and unexpected policy interventions such as the release of strategic oil reserves added uncertainty and led to a general decrease in gross exposures across the industry.

Managed futures losses generally came after emerging trends reversed sharply, although managers with large fixed income allocation saw smaller losses as bond markets continued to trend upwards. Relative value and event driven styles were also held back by falls in both equity and credit markets.

The market environment was challenging again as on-going European sovereign debt issues, combined with ‘soft’ US economic data, led to a pullback in risk appetite. Sharp falls were seen in equities before a solid rebound, but overall the MSCI World Index ended down -1.6%.

The US dollar, which rose for the majority of the month, pulled back sharply in the last week to end down -0.5%, while the euro reversed its recent decline and rose 1.3% on the back of expectations of an ECB rate rise in July and some optimism that policymakers would find a solution to Greek debt woes. Commodities experienced another negative month with crude, precious metals, and some agricultural products falling on both fundamental and technical signals.

Managed futures and global macro
Many managed futures managers were drawn in by trends in the first three weeks of June which later snapped back in the final week as events in Greece unfolded. As a result, the Newedge CTA Index fell -1.7% with losses concentrated in the last week of June as recently built up short positions in equities, increased longs in fixed income instruments and reduced shorts in USD suffered from the rebound.

Long term trend followers were also hurt by commodity exposure as crude oil price movements hurt the longs and natural gas prices pulled back sharply after moderate temperatures in the US reduced the outlook for demand. On the plus side, short-term volatility trading provided some opportunities.

Global macro strategies also struggled with the HFRI Macro Index down -1.7%. Long energy and agricultural positions were again hurt – particularly after the International Energy Agency announced it had released strategic oil reserves for only the third time since 1975 to offset supply constraints in Libya. And a huge sell off in agricultural products led corn down -15.9% and wheat -25.2%, and overall the S&P GSCI Index fell -5.3%.

Relative value and event driven
Relative value strategies finished the month fairly flat as the HFRI Relative Value Index dropped -0.1%. Convertible bond arbitrageurs were generally the worst performers within the style (HFRI Convertible Arbitrage Index down -1.0%), while managers with high levels of underlying equity short hedging performed better. Disappointingly, new issuance remained low with only seven new deals in June.

Event-driven strategies continued to post negative returns with the HFRI Event Driven Index falling -1.1% on the back of poor performance in both equity and credit markets. Distressed managers tended to suffer across all asset classes, but merger arbitrage specialists outperformed within the style (HFRI Merger Arbitrage Index down -1.3%), although some may have been hurt in July with the high profile breakdown of News Corp’s bid for BskyB.

Equity hedged strategies
Equity hedged styles were again broadly negative as global indices proved downbeat and positions were whipsawed by volatile market conditions. The HFRI Equity Hedge Index fell -1.2% as managers who reduced net and gross exposures to protect capital were unable to fully participate in the late June rally, and unsurprisingly it was those with a short bias who posted the largest gains (HFRI Short Bias Index up 4.2%). In European equities, those exposed to Financials like Lloyds and Barclays fared worst, but funds with a higher weighting of Consumer Discretionary stocks helped protect returns as the sector rallied 1.7%.

The above is excerpted from the Man Group's Man on the Month report for June 2011

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