April was a month of recovery for hedge funds as managers took advantage of a renewed appetite for risk following the disaster in Japan
April was a month of recovery for hedge funds as managers took advantage of a renewed appetite for risk following the disaster in Japan.
After a challenging March, managed futures were the top performer, and strong gains were also posted in global macro and emerging markets strategies. Commodities and equity bets also paid off although gains have been curtailed by falls in early May.
Markets enjoyed a rebound after a turbulent previous month with several stock markets rising to levels last seen in 2008, including the S&P 500 which ended the month at 1,363.61 (March close: 1,325.83) on the back of strong corporate earnings in Q1, an improved labour market and boosted confidence. China’s main stock market index, the Shanghai Composite Index, hit a 2011 high on 18th April reaching 3057.329.
Meanwhile, the sharp falls in the US dollar, down 3.4 per cent on a trade weighted average, were countered with a rally in the euro – up 1.8 per cent on a trade weighted basis. And the long term commodities bull run continued, supported by a weakening dollar, with the precious metals, gold and silver, up 9.2 per cent and 27.2% respectively in the face of inflation concerns. Dramatically, these have fallen off in the first weeks of May.
Managed futures and global macro
Managed futures rebounded in April despite a choppy start to the month due to continued concerns about Japan, civil unrest in the MENA region and fiscal challenges in European peripheries.
Over the month, The HFRI Systematic Diversified Index surged 4.1 per cent with performance driven by short positions in the US dollar as the greenback continued its weakening trend. Long positions in commodity-linked currencies and the euro against the USD also drew returns as improved optimism about global growth and higher commodity prices encouraged risk-taking.
Global macro strategies also posted impressive gains with the HFRI Macro Index up 2.8 per cent. Inflation fears in the US, coupled with an S&P downgrade on US debt pushed the US dollar index down, benefitting short positions, while in commodities, long positions in crude oil proved popular. Looking forward, uncertainty rules, although many remain bullish on emerging markets in the medium to long term.
Relative value and event driven post strong performance
Relative value managers and event-driven strategies also profited in April as rallies in underlying credit and equity markets provided a tailwind to returns. Overall, the HFRI Relative Value Index jumped 0.8 per cent while the HFRI Event Driven Index grew 1.2 per cent.
Within the relative value complex, credit and fixed income arbitrage managers generally ended the month in positive territory thanks to continued high yield issuance. Confirmation from Federal Reserve Chairman, Ben Bernanke, that extended monetary easing will not end abruptly also rewarded these strategies.
Elsewhere, volatility strategies generally struggled as the CBOE VIX index fell 299 bps.
Equity hedged strategies performance mixed
Equity hedged returns were supported by rising equities prices across many major stock markets, although some funds continued to suffer from short positions and hedges therefore lagging on a relative basis. Overall, the HFRI Equity Hedge Index was up 1.4%.
Q1 earnings in the US generally surprised on the upside, while in Europe only around 20 per cent of companies beat expectations.
It was in Asia ex-Japan that equity hedged strategies really paid off with the MSCI Pacific ex-Japan index up 5.1 per cent. In Japan, markets traded sideways in the aftermath of March’s dramatic earthquake and tsunami.