Industry Updates

New Credit Suisse/Tremont commentary offers insight into May hedge fund performance

Friday, June 18, 2010

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Opalesque Industry Update - The Credit Suisse/Tremont Hedge Fund Broad Index posts -2.76% in May as volatility and risk aversion rise

Whereas nine-out-of-ten hedge fund strategies in the Index were positive in April, nine-out-often strategies were negative in May as volatility almost tripled from April lows (as measured by the CBOE VIX volatility index). Market volatility was driven by a number of factors and events that unfolded throughout the month, the most dominant of which was the sovereign risk situation affecting peripheral European economies.

The Index’s performance of -2.76% represents the first month of negative performance since February 2009, and the worst monthly performance since November 2008 when the index fell 4.15% in the wake of the Lehman bankruptcy. Nonetheless, hedge funds’ ability to position defensively allowed them to outperform equity market indices such as the S&P 500 Total Return Index (-7.99%) and the MSCI World Index (-9.77%) by margins of more than 5% and 7%, respectively. The widespread risky-asset sell-off led to rising correlations between and within asset classes which negatively impacted many managers across different strategies.

Here is a short summary of major events that impacted markets in May:

• May 2, European governments agreed on a €110 billion bailout for Greece (US $134 billion);

• May 6, a flash crash occurred in US stock markets and the Dow Jones Industrial Average dropped 1000 points in 20 minutes before bouncing back;

• May 10, the European Union announced a €750 billion bailout plan (almost US $1 trillion);

• May 18, Germany unilaterally implemented a ban on shorting of ten financial stocks and Eurozone bonds, causing a market drop;

• May 20, North Korea threatened an “all-out war” in response to South Korea’s claim that they torpedoed a South Korean warship, and the VIX Volatility Index reached a 10-month intra-day high of 45 following its two-year low of 15.5 in mid-April (see Figure 1, left-hand axis);

• May 28, Fitch Ratings downgraded Spain’s AAA sovereign credit rating, negatively affecting the euro. As a result of “flight-to-safety” moves by investors buying US Treasuries, the US dollar strengthened versus the euro to levels last seen on October 27, 2008, when it was at $1.24 (see right-hand axis in Figure 1). Additionally, the oil spill in the Gulf of Mexico, regulatory reform in the US, and tensions in the Middle East contributed to investor uncertainty.

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