July 22, 2002

Short-Sellers and CTAs Beat the Bear in June

NEW YORK (HedgeWorld.com)--Sinking equity markets didn't spoil the party for investors in managed futures programs and short-biased funds, which posted big monthly gains on the CSFB/Tremont* Hedge Fund Index for the month of June.

While the Standard & Poor's 500 stock index lost about 7.3% for the month, the CSFB/Tremont Hedge Fund Index slipped by about 0.8%, leaving year-to-date returns at 1.3%. But the biggest gain in June was among managed futures trading advisers who picked up 8.6% on the month, pushing the component of the alternative benchmark into the black for the year at about 5.7%. "It was a great month. For managed futures, it was the moves in currencies and interest rates that produced these results," said Mark Rzepczynski, president of the Boca Raton, Fla.-based John W. Henry & Co., a CTA with US$1.3 billion under management.

"It's a virtual feedback loop between equities and currencies. Each bad day in the stock market is helping to weaken the dollar, and the trending in currencies is helping CTAs. And currency markets are highly liquid so traders are able to exploit them more than you would be able to if it were a less-liquid physical commodity market," he said.

Still, many investors weren't able to benefit from the move because they made a strategic decision to omit managed futures and bulk up on equities and equity-focused hedge funds, he said.

"The biggest moves in the futures markets have been over the last six weeks. If someone had been waiting on the sidelines, they probably missed it because they were bullish on the stock market and would have not been able to move fast enough," Mr. Rzepczynski said.

"It's an argument, I think, for using managed futures as a diversifier. It's also an argument for CTAs to avoid drifting away from their discipline and focusing on things like equity futures or strategies that can add correlation (to stocks)," he said.

June's carnage on Wall Street also sent short-biased managers into a feeding frenzy. The dedicated short-biased component of the CSFB Hedge Fund Index gained 7.6% on the month, leaving year-to-date returns the highest for any sub-index--up 9.3%.

"Primarily the performance (of short-biased funds) in June was connected to the realization that investors had that companies had been stretching in their reporting and aggressive accounting and that there was nowhere left to stretch," said David Schroll, portfolio manager for Wayne, Pa.-based Argos Advisors' Waterloo Partners Fund.

"This stretching crosses all sectors. A while back you would have seen this mostly in technology, but now you having it spilling into sectors where we didn't have it before like building and retail. The fact that interest rates are low is also starting to weigh in. Cutting them further will have diminishing results so those companies that are stretched are going to start feeling it more. Even in the building sector, which had been resilient, you are starting to see a fizzle," Mr. Schroll said.

Also bending under the weight on bearish conditions, long/short managers as a group gave up nearly 1.3% in June. The loss pushed the long/short component of the CSFB/Tremont Hedge Fund Index down more than 0.5% year-to-date.

Equity market-neutral funds clung to their capital in June, gaining a modest 0.5%, leaving returns at 3.3% for the year.

The biggest loss for any component of the alternative benchmark came from emerging markets managers who gave up 3.7% in June, eroding some of the stronger monthly gains that the sub-index was earlier this year. Despite the loss emerging markets managers were up 5.3% for the year. Meanwhile, event-driven lost 2.9% on the month, leaving the sub-index down 0.1% year-to-date.

Fixed-income arbitrage hedge funds gained about 0.7% in June, leaving year-to-date returns at 6.1%. Convertible-arb funds lost 0.3% on the month, leaving the tally at negative 1% through June 31.

The CSFB/ Tremont Hedge Fund Index is constructed using a database of about 2,600 hedge funds. Funds are not excluded until they liquidate or fail to meet the financial reporting requirements, in order to minimize survivorship bias. For inclusion, a fund must have US$10 million under management.

*Tremont Advisers Inc., Rye, N.Y., is a minority investor in, and strategic partner of HedgeWorld.

PGallo@HedgeWorld.com

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