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No Midsummer Cheer for Hedge Funds

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LILLE, France (–Flat stock market returns, coupled with a level of volatility that was low by historical standards but relatively stable, were the main factors behind the generally indifferent returns on the Edhec alternative indexes for the month of June.

For the second consecutive month short-selling achieved the best returns, advancing 1.3%. In positive territory also were equity market neutral (0.88%), merger arbitrage (0.74%), emerging markets (0.49%) and relative value (0.47%).

In spite of Edhec’s observation that “[c]ommodity prices increased significantly from their historical mean, driven by the recent uncertainties,” CTA global was the worst performer, with returns of negative 1.17%. This may be an indication that, having unwound their longest positions during the commodities price slump in May, CTA strategies found themselves net short in June, and unable to profit from the price recovery.

It was a poor month, too, for long/short equity, down 0.51%, and for Edhec’s fund of funds index (down 0.46). Other strategies were more or less flat: fixed-income arbitrage (up 0.06%), convertible arbitrage (up 0.09%), and event-driven (up 0.15%) were slightly positive, while distressed securities (down 0.12%) and global macro (down 0.20%) both slipped a little.

Since the January 2001 inception of these indices, the best risk-adjusted performer has been distressed securities, with an average annual return of 14%, a standard deviation of 3.9% and a Sharpe ratio of 2.55. In absolute terms, the best hedge fund strategy returns have come from emerging markets, with an annual return of 15.3% since inception, standard deviation of 8.1% and a Sharpe ratio of 1.4.

Edhec uses principal component analysis in order to isolate common factors in the information on hedge fund returns provided by other indexes. The indexes it uses are: HFR; Credit Suisse/Tremont; EACM, HF.Net; Altvest; Van Hedge; Hennessee; CISDM (Center for International Securities and Derivatives Markets); Barclay; and S&P Hedge Fund Index.

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Contact Bob Keane with questions or comments at [email protected].