|S&P 500||1.62%||1.62%||12.56%||Large-cap stocks|
|Nasdaq Composite||6.91%||6.91%||29.91%||Large-cap tech stocks|
|Russell 1000 Growth||2.49%||2.49%||15.90%||Large-cap growth stocks|
|Russell 1000 Value||1.49%||1.49%||13.23%||Large-cap value stocks|
|Russell 2000 Growth||7.56%||7.56%||28.35%||Small-cap growth stocks|
|Russell 2000 Value||4.99%||4.99%||22.30%||Small-cap value stocks|
|MSCI EAFE||2.16%||2.16%||12.07%||Europe, Australasia & Far East Index|
|Lehman Aggregate||-3.36%||-3.36%||0.43%||U.S. Government Bonds|
|Lehman High Yield||-1.10%||-1.10%||17.18%||High-yield corporate bonds|
|Carr CTA Index||-1.71%||-1.71%||7.83%||Managed futures|
|Through July 31, 2003.|
At first glance, July’s market index returns don’t appear particularly ominous. With the S&P 500 up almost 2% and the Nasdaq surging nearly 7%, it might seem that the markets were fairly easy to navigate during the month. But for hedge funds, those unregulated investment partnerships that are gaining a larger foothold in the portfolios of ultra-affluent investors, nothing could be further from the truth.
The paltry performance of hedge funds in July has its roots in the bond market. After the June 25th Federal Reserve Open Market Committee meeting, many market participants were convinced that the Fed would enter into an aggressive policy of buying Treasury bonds in order to keep long-term rates low. As a result, many traders began amassing large bond positions, which pushed prices dramatically higher. When this scenario did not come to pass, many of these positions were unwound, which led to large losses in many fixed-income indexes.
There are two schools of thought about the bond selloff, which continued throughout the month. One group contends that rising yields are largely due to the expectation of greater economic growth in the second half of the year. Others believe the move by Greenspan was an effort to slowly deflate the bond market bubble. Whatever the cause, the effect was an astonishing 140 basis-point rise in 10-year yields in just six weeks
One of the first casualties of the bond meltdown was the corporate fixed-income market. With credit spreads widening, prices of corporate paper fell significantly. Increasing supply, led by General Motor’s massive $17 billion bond offering, also contributed to the weak tone of the market. Mortgage spreads also widened, leading to losses for many mortgage-backed securities hedge funds.