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June 2005 Hedge Fund Performance Commentary
Shashi K. Agarwala, Hedge Fund Analyst
August 2005


Hedge fund performance across the globe perked up in June following a mediocre month in May. According to the Eurekahedge Hedge Fund Indices, the top three markets were Europe (+1.76%), Japan (+1.49%) and North America (+1.47%). Comparatively, Japan was down 0.17% in May and Europe was up 0.32% over the same period.

North America
Latin America
Asia ex Japan

North America

Performance of US equities and bonds was flat in June as volatility remained at historic lows. The MSCI North America Equity Index returned a mere 0.4% for the month. North American investing hedge funds however continued their rally from May, posting a gain of 1.47% for June.

North America - Jun 05 Performance

With a return of 0.82%, June was by far the best month for convertible arbitrage funds in 2005. This was attributable to tightening credit spreads, which were driven primarily by the improvement in the auto sector and benign inflation numbers as well as improved convertible market liquidity, especially for smaller issues. Year-to-date return for convertible arbitrage funds however remain in the red.

The spread between short-term interest rates and longer term 5- and 10-year treasury yields continues to narrow throughout the year, falling by 78bp and 118bp respectively since the start of the year, with a drop of another 20bp in the month of June. Hence despite the absolute level of current interest rates, the US yield curve could ultimately become inverted, which would continue to pose a significant problem for many financial institutions as the future of interest rate movements remains uncertain. Moreover there is currently no reason to believe that the Fed is done with its current tightening cycle following its 25bp increase at the end of June. Against this credit market scenario, North American fixed income funds did relatively well and posted a gain of 0.71% in June.

North America
Strategy June 05 (%) May 05 (%) YTD 2005 (%) 2004 returns (%) 2003 returns (%)
Convertible Arbitrage 0.82 -0.24 -0.92 5.34 12.24
Distressed Debt 1.10 0.26 2.05 20.68 33.13
CTA/Managed Futures 1.15 1.71 -2.80 4.93 16.22
Event Driven 1.32 1.66 1.86 15.86 28.93
Fixed Income 0.71 0.41 1.58 11.04 15.73
Long/Short 1.96 1.81 1.71 9.46 23.53
Macro 1.43 2.52 1.87 6.53 32.27
Multi Strategy 0.09 0.67 0.29 8.80 19.50
Relative Value 2.10 0.51 2.88 11.72 25.66
All Strategies 1.47 1.30 1.01 21.77 21.77

Despite the flat equity markets, long/short managers did exceptionally well to post a return of almost 2%. Small-cap stocks were the flavour of the month.

The US dollar continued to push higher against the euro, Swiss franc and the Japanese yen. Volatility and corporate leverage levels both remain at historically low levels, suggesting that future default rates are likely to also remain low. M&A activities picked up steam during the month. All these benefited distressed debt, event-driven and macro funds, all of which posted returns well in excess of 1% during the month. CTAs also ended the month with an impressive gain of 1.15%.

Latin America

The MSCI Latin America Index had a stellar month in June, gaining 4.6% with a year-to-date performance of 8.9%. The returns have been quite volatile with a standard deviation of 27%. On the other hand, the Eurekahedge All Strategies Latin American indices (onshore and offshore) registered a modest gain of 0.81% and 0.94% respectively with less volatility.

The hot topics of the month were the completion of the debt swap by Argentina and the corruption scandal in Brazil involving the ruling party's (PT) illegal payments to congressmen. Despite that, June remained a fairly good month in general as Latin American economies continued to grow.

It was however a bad month for CTAs as the onshore funds were hammered by recent decline in global commodity prices as well as eroding growth prospects in Europe and parts of Asia. The Eurekahedge Onshore CTA/Managed Futures Index dropped a sharp 8.85% for the month. Onshore relative value funds also witnessed a small decline of 1.13% as onshore managers could not take advantage of the highly volatile markets. All other strategies did quite well with returns ranging from 1.22% to 1.88%.

LATAM Onshore
Strategy June 05 (%) May 05 (%) YTD 2005 (%) 2004 returns (%) 2003 returns (%)
CTA/Managed Futures -8.85 -6.25 -13.99 24.37 20.10
Fixed Income 1.52 1.51 8.89 15.60 39.25
Long/Short 1.36 0.96 4.05 35.40 55.83
Macro 1.88 0.13 4.66 6.67 9.82
Multi Strategy 1.22 1.72 7.40 19.76 35.87
Relative Value -1.13 0.65 -5.58 48.56 54.11
All Strategies 0.81 1.23 5.58 22.38 36.68

Offshore funds, on the other hand, did reasonably well with all strategies posting positive gains. The best performers for June were macro funds, returning more than 2% amidst a backdrop of rising US interest rates, rising oil prices, rising inflation and a general global slowdown. This is followed by event-driven and distressed debt funds, which benefited from increased corporate activities in Latin America and on the completion of the debt swap by Argentina in June. Despite the highly volatile equity markets, long/short managers did well to remain in positive territory.

LATAM Offshore
Strategy June 05 (%) May 05 (%) YTD 2005 (%) 2004 returns (%) 2003 returns (%)
CTA/Managed Futures 1.09 0.08 4.07 18.29 27.37
Fixed Income 1.25 2.28 13.06 22.57 38.56
Long/Short 0.84 0.28 4.45 11.07 23.85
Macro 0.74 0.22 3.00 17.71 54.76
Multi Strategy 2.06 -0.03 1.99 6.59 40.02
Relative Value 0.61 0.43 2.95 11.68 25.90
All Strategies 0.94 0.27 3.52 15.28 36.70


June was once again a strong month for the European markets. The MSCI local currency index registered a gain of 3.24%, which made it a new 3-year high. The rally was across the board; oil and gas stocks were the star performers, rising 9% in June. Corporate activities and bid speculations remained high as interest rates continued to decline. The strengthening of the US dollar (up 2.02%) against the euro triggered an increase in inflows into European equities. Bond yields in the US and Europe remained low before bouncing back on the first day of July in response to higher-than-expected ISM figures, which was up by 2.4% at 53.8. The main concern continues to be rising oil prices which touched $60/bl in late June, causing a sharp but brief decline in the European equity indices.

Against this positive backdrop, the Eurekahedge All Strategies European Index registered a 1.76% return in June versus 0.32% in May. Long/short and multi-strategy funds outperformed their peers, posting a strong return of 2.06% each. Event-driven and distressed debt funds did well on the back of increased corporate activities - corporate restructurings, flourishing IPOS and M&A activities - and private equity firms' growing appetite for European equities, which showed no signs of abating.

The worst performers in June were convertible arbitrage funds, most of which could not take full advantage of the increased volatility and widening credit spreads in the second quarter. Year-to-date performance of convertible arbitrage funds remains negative.

Strategy June 05 (%) May 05 (%) YTD 2005 (%) 2004 returns (%) 2003 returns (%)
Convertible Arbitrage -0.81 -0.58 -2.91 -0.35 3.03
Distressed Debt 1.76 0.75 2.66 17.26 34.12
CTA/Managed Futures 0.30 -0.43 2.53 -8.16 7.44
Event Driven 1.40 -0.31 3.93 6.96 10.60
Fixed Income 0.48 0.31 2.03 8.48 16.64
Long/Short 2.06 0.41 5.34 10.07 10.85
Multi Strategy 2.06 -0.68 2.03 14.40 12.68
Relative Value 0.65 0.14 2.56 5.71 9.22
All Strategies 1.76 0.32 4.54 8.62 10.49

Japan Only

The Nikkei 225 continued to rally in June, rising 2.73% led by gains from the large-cap sectors of mining, construction and oil. Small-cap stocks also did well on better domestic data.

This continued rally had a positive impact not only on Japan-only long/short strategies but also benefited multi-strategy and relative value funds, whose investment mandate remains primarily Japanese equities. Although the Nikkei 225 was up 2.4% in May, managers could not ride the bull run due to large swings in the market throughout the month. However, thanks to an upward trend of the Nikkei 225 since mid-May, the market rewarded all managers who retained long biases in their portfolios. The Eurekahedge Japan Only All Strategies Hedge Fund Index rose 1.49% in June.

The Eurekahedge Japan Only Long/Short Equity Index was up 1.55% in June as compared to 0.11% return in May, reflecting the cautious optimism most managers showed on the back of the recent positive "tankan" survey conducted by Bank of Japan, which showed a rise in confidence among Japanese firms and the plans for higher capital spending. This helped relative value funds with an opportunity to exploit new market developments. The Eurekahedge Japan Only Relative Value Index was up by 1.03% in June as compared to 0.06% in May 05. Japanese multi-strategy funds, whose investment mandate primarily retains significant equity exposure, also benefited from the rally. It was up 0.49% in June as compared to a negative return of 1.36% in May. Increasing employment rates and higher imports suggested continued positive demand, despite the higher price of oil. The rise of the US dollar against the Japanese yen (up 2%) and the continuing rally of JGB also boosted the returns of multi-strategy and relative value funds.

Japan Only
Strategy June 05 (%) May 05 (%) YTD 2005 (%) 2004 returns (%) 2003 returns (%)
Long/Short 1.55 0.11 4.84 8.11 16.29
Multi Strategy 0.49 -1.36 3.30 26.69 26.74
Relative Value 1.03 0.06 4.07 6.42 6.07
All Strategies 1.49 -0.17 4.19 9.30 18.37

Asia ex Japan

After reaching its lowest points in Jan 05 and Apr 05, Asia Pacific ex Japan equities did surprisingly well in the final month of the first half of 2005 amidst rising oil prices, rising interest rates and a global slowdown. Thankfully, US inflation data has allayed investor fears of sharply higher interest rates going forward.

All regional markets, except the Philippines, which has been hit by a deepening political crisis, rose in local currency terms. The best performing market was again India which rose a little more than 7% in local currency terms, partly due to the performance of Reliance following the resolution of a family dispute. Taiwan, South Korea, Malaysia and Hong Kong rose around 3% as investors continue to perceive lower risk levels in these economies. Thailand registered a modest gain of around 1% amidst inflation fears while the Shanghai Composite was up only 2%. The Chinese domestic A share market is now in its fifth year of a bear market, having halved from its peak.

The momentum of the Chinese and Indian economies, along with the US growth rate will be a key issue for markets in the coming months, and oil prices will obviously remain a concern in the very near term. Further, the scrapping of the Chinese yuan peg against the US dollar on 21 July will make the Chinese economy more attractive to investors, and hence is set to boost hedge fund flows both in terms of assets and new funds in Asia. The yuan was revalued by 2.11% to 8.11 to the US dollar.

Thanks to the largely bullish overtone in the Asian equity markets, the Eurekahedge Asia ex Japan All Strategies Index was up 1% in June as compared to 0.2% in May, led by gains in fixed income, convertible arbitrage, equity long/short and event driven hedge funds.

Asian credit markets continued their recovery in June; the Eurekahedge Fixed Income and Convertible Arbitrage Strategy indices were both up by 1.5%. This is in sharp contrast to their May performances (see table below). This upside was due mainly from a slew of new issuances both in the high grade and high yield sectors. This was to take advantage of the low US treasury yields. The demand was met primarily by banks and hedge funds. An estimated US$5bn was raised through bond issues in June in Asia.

The continued rally in the Asian markets helped long/short managers with the Eurekahedge Long/Short Equity Index gaining 1.18% in June. June was also a good month for event-driven funds; the Eurekahedge Event Driven Index returned more than 1% for the month.

Asia ex Japan
  June 05 (%) May 05 (%) YTD 2005 (%) 2004 returns (%) 2003 returns (%)
Convertible Arbitrage 1.46 -1.68 1.73 -1.79 n/a
Distressed Debt 0.35 0.67 5.07 19.13 24.12
Event Driven 1.05 0.69 4.49 17.01 9.31
Fixed Income 1.47 0.13 5.21 14.67 11.90
Long/Short 1.18 0.15 3.32 8.23 36.55
Multi Strategy 0.59 0.08 1.11 12.85 29.37
Relative Value 0.04 1.07 11.07 -3.48 34.13
All Strategies 1.00 0.20 3.38 9.25 32.33

A weak jobs report in the US and the FX volatility in June did not help relative value funds which seek to make money on relative inefficiencies of their investment targets. However if the markets are too volatile they don't help the cause. The Eurekahedge Relative Value Index registered a 0.04% return, making it the worst performer amongst its peers for June.


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