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Eurekahedge Hedge Fund Indices
Hedge Fund Monthly

July 2005 Hedge Fund Performance Commentary
Shashi K. Agarwala, Hedge Fund Analyst
Eurekahedge

December 2005

Overview

Despite an eventful month with terrorist attacks in London, rising oil prices, yuan revaluation and benign US employment figures, hedge funds maintained their good performance across the globe in July following a recovery month in June. European investing hedge funds again came up with the best performance across all markets with the Eurekahedge European All Strategies Hedge Fund Index registering a 2.07% return. North America and Asia ex-Japan and North American markets were the two next best performers in terms of rankings with returns of 1.89% and 1.84% respectively.

Europe
Asia ex Japan
North America
Latin America
Japan

Europe

July 2005 saw equity markets continue to rally with the MSCI European Index (USD) registering a gain of 3.54%. This was despite the London bombings on 7 July 2005 and attempted repetition on the 21st. Equity markets were particularly strong in Germany (+6.6%), Switzerland (+5.7%), France (+5.3%) and Norway (+5.1%). The laggard was unsurprisingly the UK. The reasons for the strong market strength could be cited to strong corporate earnings, continuous positive economic data from the US, revaluation of the Chinese yuan and an increase in institutional liquidity. In the Forex market, the dollar ended the month slightly down at 1.2127 against the euro while crude oil ended the month just below $60. Corporate bond yields edged up higher too.

All this helped European hedge fund managers maintain their dominance in terms of best performance across global markets for the month of July. The Eurekahedge European All Strategies Hedge Fund Index returned 2.07%, a high not seen since January 2004. Although all the strategies did well, the best performing ones were unsurprisingly long/short (+2.34%) and multi-strategy funds (+1.76%). In positive territory but fairing not quite as well were CTAs and managed futures funds, with a return of 0.38%. This however was still better than June.

European Hedge Funds
Strategy
July 05 (%)
June 05 (%)
YTD 2005 (%)
2004 returns (%)
2003 returns (%)
Convertible Arbitrage
1.32
-0.28
-0.93
4.89
3.68
CTA/Managed Futures
0.38
0.35
2.96
-8.16
7.44
Distressed Debt
1.68
1.58
4.20
17.26
34.12
Event Driven
1.67
1.37
5.67
6.96
10.60
Fixed Income
1.21
0.66
3.64
9.32
19.31
Long/Short
2.34
1.99
7.76
10.09
10.79
Multi Strategy
1.76
1.86
3.92
13.95
12.01
Relative Value
0.87
0.65
3.23
5.71
9.22
All Strategies
2.07
1.65
6.60
8.84
10.51

Asia ex Japan

Asian equity markets remained strong in July despite rising oil prices and expectation of high US dollar interest rates. The reason for this could be cited as abundant liquidity (mainly from long-oriented international funds and domestic equity savings schemes), reasonable valuations and continued US growth. The main event during the month was China's abandoning of its currency peg and revaluating it by a marginal 2.1%. The move was very small and had no meaningful impact but it softened the US-led economic and political tensions. In response Malaysia scrapped its peg too and has now a managed float system. Otherwise the response of other Asian currencies remained largely muted.

The equity rally in Asia was led was by Korea with a double-digit gain whose second quarter GDP accelerated to an annualised 3.3%. This was supported by business investment, public sector and paced by the banking sector which received a sovereign upgrade to "A" by S&P. On the other hand, Taiwan was the worst performer as the economy appears to be slowing down. June industrial production growth was only 1.3%. Overall the MSCI Asian Emerging Markets Index was up almost 6%. The Asian credit markets also remained resilient in the month of July with a robust demand for credit backed by ample supply (liquidity).

MSCI Equity Index Performance
MSCI Equity Indices (USD)
July 05 (%)
June 05 (%)
China
7.25
4.11
India
5.40
8.11
Philippines
0.93
-2.97
Taiwan
0.02
2.29
Thailand
1.61
-0.29
South Korea
12.30
0.29
Malaysia
7.27
3.06
Indonesia
6.26
1.58
Emerging Markets Asia
5.91
2.42

Against this backdrop the Asian hedge fund performances in July 05 witnessed a sharp recovery as compared to a modest June. The Eurekahedge All Strategies Asia ex Japan Hedge Fund Index registered a return of 1.93% in July as compared to 0.91% in June. While the upward bound Asian equity markets helped the long/short managers post a return in excess of 2%, the resilient Asian credit markets helped fixed income managers post similar returns.

With the surging equity markets and ample liquidity, July 2005 also saw a pick-up in M&A activity. Overall the bullish sentiments in July helped hedge fund performances pan Asia, except relative value funds, some of which seemed to have been hit by the wrong bet on the Chinese bid over UNOCAL.

Asia ex Japan Hedge Funds
Strategy
July 05 (%)
June 05 (%)
YTD 2005 (%)
2004 returns (%)
2003 returns (%)
Convertible Arbitrage
1.95
0.88
3.13
-1.79
n/a
Distressed Debt
0.88
0.46
6.11
19.13
24.12
Event Driven
1.18
0.62
4.70
17.73
9.31
Fixed Income
2.35
1.47
7.68
14.67
11.90
Long/Short
2.11
1.12
5.15
8.20
36.73
Multi Strategy
1.90
0.67
3.47
12.80
29.62
Relative Value
-1.29
0.04
9.64
-3.48
34.13
All Strategies
1.84
0.94
5.12
9.28
32.49

North America

The MSCI USA Equities Index returned 3.64% for the month as compared to 0.1% in June. The S&P 500 returned 3.56% during the month. Alan Greenspan would soon be stepping down and with that more increases in short-term rates would be doubtful. The bond markets however were not as strong as the markets had factored in more increases in short-term interest rates into bond prices.

With this economic overview, the performance of North American hedge fund markets was impressive. The Eurekahedge North America Hedge Fund Index registered a return of 1.87%. Except CTAs, the rest of the strategies did well for the month. Long/short, macro, event-driven and multi-strategy funds all posted returns of more than 2% and helped pull up the overall index.

North American Hedge Funds
Strategy
July 05 (%)
June 05 (%)
YTD 2005 (%)
2004 returns (%)
2003 returns (%)
Convertible Arbitrage
1.08
0.79
0.23
5.37
12.44
CTA/Managed Futures
-0.52
1.18
-3.35
4.70
16.27
Distressed Debt
1.96
1.29
4.21
20.29
32.85
Event Driven
2.45
1.54
4.52
15.79
28.75
Fixed Income
1.03
0.74
3.44
10.86
14.34
Long/Short
2.57
1.77
4.15
9.20
22.85
Macro
2.08
0.98
3.48
6.53
32.27
Multi Strategy
2.12
1.60
3.51
11.67
19.53
Relative Value
1.75
1.24
3.85
11.77
25.33
All Strategies
1.89
1.47
2.95
9.56
21.38

Latin America

Latin American equity markets did well in July 05, with the MSCI Latin American Index returning 6.2% as compared to 4.6% in June. This brings the YTD performance level to a healthy 15.8%. The markets were helped by the continued positive macroeconomic data pouring in from the US and China - the two main drivers of Latin American markets. Increasingly high demand for Latin American natural resources by the Chinese market (which was helped by the strengthening of the Chinese yuan) helped strengthen commodity prices thus pushing Latin American markets into positive territory. Other factors helping local economies were continued high liquidities and low yields on long-dated US treasury bonds. The Brazilian real gave up part of its gains due to renewed political jitters surrounding the bribery scandal but high interest rates should keep its currency range bound in the coming few months. The Mexican economy is still strong helped by recently released strong corporate earnings data.

Against this economic backdrop, Latin American hedge funds, both onshore and offshore, did reasonably well with the Eurekahedge All Strategies Latin American Hedge Fund Index returning 1.48% in the month of July. Comparatively this was only 0.94% in June, showcasing a much improved performance in July.

On the onshore front, the strategies which did well were long/short, multi-strategy, macro and fixed income funds, all of which produced good returns within a range of 1.3% to 2.3%. Surprisingly when one would have expected CTAs to finally post some positive numbers amidst the rising price environment, they slipped in July too (-1.49%), bringing the YTD performance to -5.11%. This perhaps shows a highly volatile market for commodity prices where managers find it extremely hard to predict future movements.

Latin America - Onshore2
Strategy
July 05 (%)
June 05 (%)
YTD 2005 (%)
2004 returns (%)
2003 returns (%)
CTA/Managed Futures
-1.49
-5.11
-7.41
23.74
19.91
Event Driven
-0.16
0.47
15.93
39.54
36.13
Fixed Income
1.32
1.52
10.32
15.60
39.25
Long/Short
2.26
1.63
6.92
35.27
55.83
Macro
1.62
0.18
4.15
6.63
9.80
Multi Strategy
1.38
1.24
9.15
19.65
36.39
Relative Value
-1.10
-1.13
-6.62
48.56
54.11
All Strategies
1.35
0.93
7.57
22.22
37.01

For offshore managers, all strategies produced positive performances in July, continuing the positive streak in June. While the best performing strategy for the month were macro funds (+2.34%), other strategies were range bound between 0.6% and 1.9%. Most offshore managers have their offices either in New York and a few in London. They continue to produce consistent returns for investors despite sitting off ground, indicating perhaps that they are able to hedge their risks better than their onshore counterparts due to free capital markets unlike in emerging Latin American economies which have many regulatory restrictions.

Latin America - Offshore3
Strategy
July 05 (%)
June 05 (%)
YTD 2005 (%)
2004 returns (%)
2003 returns (%)
Convertible Arbitrage
0.64
0.07
3.33
5.41
n/a
Distressed Debt
1.37
1.10
5.51
18.29
27.37
Event Driven
-0.01
1.52
13.35
22.57
38.56
Fixed Income
1.03
0.91
5.58
11.07
28.75
Long/Short
1.91
1.09
5.97
17.62
54.76
Macro
2.34
0.34
2.63
6.59
40.03
Multi Strategy
1.63
0.51
4.22
10.95
22.98
All Strategies
1.61
0.95
5.55
15.26
36.75

Japan

News on the Japanese economy remained mostly upbeat, with both consumption and capital investment trending upwards. A strong outlook from the corporate earnings front and the rise in US markets helped propel share prices of Tokyo stock markets higher in July, digesting negative news including terrorism in London, rise in crude oil prices and the revaluation of the Chinese yuan. Best performing sectors were mining, construction, steel and automobiles while securities, land transportation and insurance sectors were lagging sectors. The MSCI Japan Index (USD) did well in July 05 (+0.99%) as compared to June when it was down by 0.13%. The monthly return on Topix and Nikkei indices were 2.36% and 2.72% respectively. The Bank of Japan remained cautious about its zero-rate policy and continued pumping money into the economy to stamp out deflation. However consumer prices fell by 0.2% in July from a year earlier. Rising oil prices also prompted some manufacturers (especially tyre manufacturers) to pass on the cost to consumers.

This continued rally had a positive impact not only on Japan long/short strategies but also benefited multi-strategy and relative value funds, whose investment mandate remains primarily in Japanese equities. The Eurekahedge Japan Only All Strategies Hedge Fund Index rose 1.35% in July.

Japan
Strategy
July 05 (%)
June 05 (%)
YTD 2005 (%)
2004 returns (%)
2003 returns (%)
Long/Short
1.11
1.58
5.94
8.11
16.29
Multi Strategy
1.14
0.44
4.44
26.69
26.74
Relative Value
0.78
0.65
4.49
6.42
6.07
All Strategies4
1.35
1.50
5.54
9.30
18.37

Wrapping Up

July 05 was an eventful month for the world as it witnessed terror attacks on London, rising oil prices and revaluation of the Chinese yuan. Despite this, the global economies performed well and this was reflected in the rich equity valuations across the markets worldwide. This was supported by abundant institutional liquidity, continued US growth and reasonable valuations. Going forward, concerns remains on rising oil prices and its effects on the world economy for the rest of the year, but the hedge fund industry has not much to worry about as time and again it has proved itself as not only an effective hedge against such global risks but assets which also produce alpha.

Footnotes

1Whist Eurekahedge updates hedge fund NAVs and index values on an hourly basis, the data utilised in this report is as at 21 August 2005. Please visit www.eurekahedge.com/indices for the latest index values. Another important note to take on board is that when we refer to regions, we are talking about where the respective hedge funds invest and not where they are located.

2Latin American hedge funds domiciled in Latin American countries and denominated in local currencies.

3Latin American hedge funds domiciled offshore and usually denominated in USD but running a Latin American regional mandate.

4The All Strategies Index is a separate index and derives its value not only from the actual performance of the listed strategies for the investment region but also from the strategies which are not listed (due to strict Eurekahedge indices guidelines) but having the same investment mandate.

If you have any comments about or contributions to make to this newsletter, please email advisor@eurekahedge.com

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