NEW YORK (HedgeWorld.com)--Equity markets ended 2004 with a bang, but the noise provoked little more than a yawn from sleepy hedge fund strategies in the Standard & Poor's Hedge Fund Index.
Despite returns for managed futures strategy of over 10% and U.S. long/short equity strategy returns over 6% for the quarter ended Dec. 31, hedge funds overall ended 2004 up just 3.88%, according to the S&P Hedge Fund Index. That compares with an 11% index return in 2003.
There were some positive signs at the end of the year, however. The S&P Directional/Tactical Index earned 1.45% in December, led by equity long/short managers. "After underperforming for much of the year, a strong fourth-quarter rally in U.S. markets has salvaged what appeared to be a weak year for equities," said Charles Davidson, senior hedge fund specialist at S&P. "Through stock selection and increased market exposure, hedge fund managers were able to capture much of the positive revaluations in companies."
Long/short equity strategies overall earned 1.33% in December and 4.34% in the fourth quarter, according to S&P. U.S. long/short equity strategies earned 1.62% in December and 6.17% for the quarter, while global long/short equity strategies earned 1.02% in December and 2.51% for the quarter ended Dec. 31.
The S&P Event-Driven Index finished the 12-month period up 5.66%, the best overall return of any S&P sub index (the equity long/short index was launched March 31). For the quarter, event-driven funds in the index returned 3.66%. In December, they were up 1.33%.
Within the event-driven sector, distressed and special situations hedge funds performed well thanks to positive reevaluations of a number of companies in the energy and technology sectors, according to S&P. Balance sheets improved, which caused upward earnings revisions. Merger arbitrage managers contributed little to event-driven returns, since profits stayed low despite an uptick in the number of announced transactions.
Among arbitrage funds, good returns for fixed-income arbitrage--particularly among mortgage traders--was offset by lackluster performance in equity market neutral and convertible arbitrage, which both continued to suffer from low equity volatility. The S&P Arbitrage Index finished December up 0.91%. For the quarter, though, arbitrage funds returned only 0.45%, bringing their year-to-date total return to 2.36%.
Despite the fact that they enjoyed a double-digit return quarter (10.1%) managed futures funds in the S&P Managed Futures Index were in negative-return territory for the month of December, earning negative 1.03%. Gains in European index and financial futures were offset by money-losing commodity positions in precious metals and energy, according to S&P.
"Gold dropped from its year-to-date high as the U.S. dollar rallied on the back of [Federal Open Market Committee] minutes supporting a stronger dollar, a technical rally on the perceived cheapness of the dollar and intonations by the current administration that the budget deficit will be reduced sooner rather than later," S&P officials wrote in their index summary.
The S&P Hedge Fund Index currently has 41 constituent funds.