US equity markets ended August positively (+1.29% for the S&P 500) and bond markets continued to rally (+1.21%) as fears of a global credit crisis spread. Volatility, measured by the implied volatility index VIX, stayed at its highest level since Q1 2003.
Commodity price levels posted negative returns (-4%) moving back from their maximum historical levels reached the previous month. Unlike previous months when equity markets fell and hedge funds outperformed, the environment in August proved more treacherous for managers and most hedge fund strategies were negative for the month.
The best performing strategy was equity market neutral, which delivered a return of -0.82%, followed by CTA global with a monthly return of -0.99%. The lowest return was the -2.07% reported by funds of funds, which can be seen as a proxy of the average of all hedge funds. The subprime crisis meant that long/short equity managers experienced their worst month since May 2006, driven by the uncertainty associated with the banking sector's exposure to credit-linked asset-backed securities rather than by a deterioration of economic fundamentals.
Event driven managers faced difficulty secondary market conditions, which led to diminishing market holdings, and the impact of tighter credit standards, which impacts the ability to finance deals.
Fabrice Tahar is a research analyst with the EDHEC Risk and Asset Management Research Centre