Global financial markets continued to recover in August, despite some volatility on account of the Lebanon crisis, the hurricane forecasts, the London terror threat, and weak US economic data. The Eurekahedge fund of funds index returned 0.6% for the month of August and 4.5% for the year to August. The month saw profitable opportunities in most asset classes, as global inflation fears subsided and the markets began to anticipate the end of the Federal Reserve’s monetary tightening cycle.
The Fed’s pause came amid signs of an economic slowdown in the US and forecasts that inflationary pressures will ease gradually. Market movements during the month were shaped by the ceasefire between Israel and Hizbollah (which reduced overall geo-political risk as also the risk premium on oil).
With the Fed taking a pause in its rate hikes and benign inflation data, global equity (the MSCI World Index was up 2.3%) and bond markets rallied on forecasts of lower interest rates.
The treasury rally also lent strong support to other rating classes, and the high yield market too had a good run. Metals, on the other hand, saw mixed markets; for instance, gold (easing geo-political tensions) and copper (fears over an economic slowdown) declined slightly, while nickel reached record highs on the back of tight inventory levels. And lastly, in the currency markets, benign Japanese GDP and inflation data put downward pressure on future Bank of Japan interest rates, making the Yen the primary funding currency in the carry trade. Against this backdrop, hedge funds and by extension, fund of funds strategies posted healthy gains across the board. The notable ones among them were equity long/short (+1%), macro (+0.7%), distressed debt (+0.6%) and multi-strategy (+0.6%), posted healthy gains during the month. Event driven funds (+0.6%) benefited from accelerating global M&A activity during the month.
In terms of regional performance, Asian (+0.8%) and emerging markets (+1.7%) funds of funds posted the best returns for August, as emerging markets in general are beginning to see a reversal of the “flight to quality” trades of the past few months.
For the latest August 2006 returns for the Eurekahedge hedge fund and fund of funds indices please visit www.eurekahedge.com/indices.
Rajeev Baddepudi is hedge fund analyst with Eurekahedge in Singapore.