Hedge fund performance poor in August says Eurekahedge

Hedge fund performance in August was characterised by loss mitigation and short-term trading, according to the latest report by Eurekahedge. The research group said the poor results were caused by concerns over a global economic slowdown.

The composite Eurekahedge Hedge Fund Index dropped 1.2% in August. Global commodities and equities (MSCI World) also fell 6% and 1.6% in value, respectively. Returns from hedge fund regional and strategy mandates were negative across the board. The biggest average losses came from directional equity and emerging market allocations.

Extremely volatile equity markets in August led to only a few major equity indices finishing the month in positive territory. Equity returns generally reflected those from regional hedge fund allocations. The month’s slide in commodity prices had a visibly heavier impact on emerging equities — China -13%, Korea -8%, Hong Kong -6%, Brazil -6% all posting falls while only positive returns from India 1.5%.

Hedge fund allocations to Asia excluding Japan fell the most in value on average by 2.5%. Distress in the US financial sector had a more positive economic outlook. Hedge fund allocations to North America finished the month flat at 0.02 %.

The MSCI World Index finished August down 1.6% . Dropping commodity prices took the edge off inflationary pressures. US economic indicators pointed to a stronger outlook. Continued losses at financial institutions and instability at US mortgage lending houses Freddie Mac and Fannie Mae added to market volatility.

The result was that the S&P500 gained 1.2% on the month, while general risk aversion led to significant losses among emerging equities with the MSCI EM index down 8.2%.

Bond prices rose sharply. Demand for government-backed debt was fuelled by further write-downs and losses in the financial sector. Yields on the 10-year treasury note fell 17 basis points (bp) to 3.81%, while those on 30-year bonds fell to 4.41%.

Oil prices fell to nearly $32 a barrel closing the month at $116. Fears over dampening global demand had an impact on metals prices. Gold dropped 9% to $831 an ounce and copper was down 7%. Natural gas prices also closed down -13%.

Arbitrageurs and value players fared well during August producing near-flat returns. Directional macro was down 0.9% and multi-strategy fell 1.3%.

The Eurekahedge Arbitrage Hedge Fund Index had a flat month in August. Most of the gains came from a few Europe-focused managers. European equities moved slightly higher in August (DJ Euro Stoxx was up 1.2%) with high volatility and little momentum. Arbitrageurs in the region benefited from mean-reversion trends in these markets.

The majority of arbitrage allocations to other regions and globally reported returns in the +/-3% range. The Eurekahedge Relative Value Hedge Fund Index was similarly flat across regions down 0.2% for August.

Directional equity strategies were uniformly negative across regions in August, contributing to an average loss of 1.8% for equity long/short managers. Losses were significantly higher for emerging market allocations.

Sector performance among North American allocations was mixed, with longs performing slightly better than shorts on average. North American equities finished the month up 1.5%.

The high-volatility, low-momentum environment continued to favour bottom-up stock-picking. North American long/short managers closed August down 0.5%.

Fears of recession in Europe surfaced in the last week of August, leaving an adverse effect on long equity positions. Together with the downward pressure from losses in Russian allocations resulted in a 1.6% loss for European long/short managers on the month.

The Nikkei 225 was down 2.3% while the broader TOPIX losing 3.8% on the month. This is reflected in 1.4% fall in the returns posted by Japanese equity long/short managers for August.

Among Asia excluding-Japan long/short managers, August was a difficult month with a fall of 2.8%. The Shanghai Composite lost 13.6%. Pairs-trading in equities worked well in the Korean, Taiwanese and Hong Kong markets, helping to cushion the month’s losses.

Latin American equity market movements were dominated by international news flow and macro data. Brazil’s IBovespa was down 6% and the MSCI Latin America index lost 8.5%. Latin America was the worst performing region among directional equity managers in August, losing 3% on average.

Event-driven managers were affected by the downturn in global equities but gains from North American allocations offset losses elsewhere. The Eurekahedge Event Driven Hedge Fund Index ended the month down 0.2%.

Fixed income was one of the few strategies that generated flat to positive returns across regional allocations in August. The Eurekahedge Fixed Income Hedge Fund Index rose 2bp on average.

Distressed debt managers were down 0.9% on average for August, with minor gains coming from North American allocations up 0.4%. The high-yield market was up only 0.3%. Spreads widened by 27bp in August.

CTA/managed futures ended the month largely flat down 0.2%.

The Eurekahedge Multi-strategy Hedge Fund Index dropped 1.3% in August, with North American (0.1%) and Japanese (1.4%) managers brining down average losses.

In Japan the TOPIX ended August down 3.8% while the yen lost 0.9% against the US dollar and yields on 10-year Japanese government bonds fell by 10.5bp to 1.41%.