Standard & Poor’s announced that hedge fund returns, as measured by the S&P Hedge Fund Index (S&P HFI), lost 0.47% in October as a widespread reduction in risk appetite drove performance down during the month. Year-to- date, the S&P HFI has returned 1.94%.
“Hedge fund performance was influenced by a number of factors in October, most significantly by a substantial pullback in the global risk appetite as evidenced by widening risk arbitrage spreads and a sizeable retracement in the energy sector,” says Justin Dew, senior hedge fund specialist at Standard & Poor’s. “For hedge fund returns to be strong there needs to be a desire by investors to take on risk, that just isn’t happening at the moment.”
The S&P Directional/Tactical Index lost 0.37% in October, as global energy related markets fell sharply during the month. In the Equity Long/Short sector, long positions in energy-related stocks gave back earlier gains as the prices of the underlying commodities, namely crude oil and natural gas, fell precipitously on better inventory numbers and an announcement out of OPEC that the heating needs for the winter season will be met.
Gains were seen in the Macro sector during October, as some managers believed there to be a substantial likelihood of a near-term recession in the U.S., and therefore were short the U.S. equity market relative to Asia. In the Managed Futures sector, managers experienced losses as global equity markets reversed course earlier in the month (with the exception of Japan) causing problems for long positions in equities. Toward the latter half of October, the U.S. dollar rallied versus both the yen and euro as interest rates began to point higher, yielding profits in long dollar positions, as well as in short bond positions.
The S&P Event-Driven Index lost 1.23% in October, as all three of its underlying strategies ended the month in negative territory. The Special Situations sector suffered in October, as investors reacted negatively to a number of bankruptcy events during the month, specifically Refco and Delphi. These bankruptcies seemed to substantially impact the way investors looked at risk.
In the Distressed sector, manager returns were mixed as some were impacted by the news of the bankruptcies, while others were not. Additionally, Distressed managers took advantage of the recent investor sell off by making selected additions to their portfolios during October. In the Merger Arbitrage sector, risk arbitrage spreads widened dramatically in a few large deals as the likelihood of completion came into serious question, in particular the Guidant/Johnson & Johnson merger.
The S&P Arbitrage Index gained 0.22% in October led higher by the performance of fixed income arbitrage and equity market neutral sectors. In the Fixed Income sector, modest gains resulted from positions on the front-end of the yield curve as the Federal Reserve Bank tightening began to have a significant impact on interest rates. This, in conjunction with seemingly hawkish comments out of Europe and Japan with respect to interest rates, drove rates higher. Additional profits were also generated from positions related to yield curve volatility. Equity Market Neutral managers managed a slight gain in October, as the small-cap sector performed in a manner that suited their models well. In the Convertible Arbitrage sector, October was a rather flat month as the market softened, due in part to anticipated quarter-end redemptions in convertible bond hedge funds.