Introduction

Hedge fund returns were flat to marginally negative in June as most managers steered cautiously through volatile markets. The composite Eurekahedge Hedge Fund Index registered -0.59% returns for the month against the backdrop of a 3.56% drop in global equities and a sharp rise of risk aversion towards the end of the month (the Volatility Index on the Chicago Board of Options Exchange gained 37% from mid- to end-June). Furthermore, hedge funds have also continued to outperform underlying markets June year-to-date – the MSCI World Index is down -8.56% YTD while the average hedge fund fell only 0.12% for the year.

Hedge funds finished the month with a mixed performance across regional mandates. Downside performance was restricted to less than 2% in most regions while Latin American hedge funds rose 0.43%, largely due to the strong performance by multi-strategy managers (0.42%), who form the bulk of the index. In contrast to the 3.78% drop in the MSCI Latin American Index, all Latin American hedge fund strategies posted positive returns last month, with the exception of the offshore macro and long/short equity managers.

The chart below shows the hedge fund returns for May and June 2010 across different geographical mandates.

May and June 2010 Returns

Japanese hedge funds continue to lead in the YTD measure, with the Eurekahedge Japan Hedge Fund Index up 1.61% June YTD. Japanese long/short equity managers, the largest constituents of the index by strategy, have a successful first six months, with the funds gaining 1.71% – ahead of the Topix by 9%.

North American managers are up 0.64% YTD, driven largely by the performance of distressed debt (6.09%) and fixed income-investing hedge funds (5.07%). The heightened volatility and risk aversion in 1H2010 sparked a rush to safety among investors, increasing the demand for treasuries and corporate bonds in the US. The portfolio values…

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