In September 2005, the major hedge fund strategies not only achieved positive returns but also significantly exceeded their long-term performance.
Not surprisingly, the long/short equity strategy obtained the best performance in September in the midst of bullish stock markets (eg, +0.69% for the S&P 500), historically low levels of stock markets’ implied volatility (e.g., the VIX contract was traded at 11.92, its lowest level since November 1995), a slight widening in credit spreads (eg, the yield difference between a Baa- and an Aaa- rated bond increased by 5.68% to 0.93%) and an increase in the premium paid to small capitalisation stocks (eg, the yield difference between the S&P 600 and the S&P 500 landed in positive territory at 0.11% in September). The CTA Global strategy, on the other hand, suffered from the bearish bond markets (eg, the Lehman Global Bond Index lost 1.46% in September) and adverse market conditions in commodities markets (especially oil). The extremely low level of stock markets’ implied volatility also contributed to limiting the upside potential of the CTA Global strategy.
Like directional strategies, relative value strategies (eg, convertible arbitrage, equity market neutral) also performed well in September. The rebound in convertible arbitrage continued, mainly driven by a new equilibrium between supply and demand. It is worth stressing that the good performance of the convertible arbitrage strategy was achieved against a backdrop of historically low levels of implied volatility and the widening of credit spreads, which is generally synonymous with disappointing returns for the convertible arbitrage strategy. The equity market neutral strategy was able to take advantage of relatively favourable market conditions to post its best performance since November 2004.
Event driven strategies (ie, merger arbitrage and distressed securities) were able to generate their fifth consecutive positive monthly return in September, which places them in second position in terms of year-to-date return; behind the equity long/short strategy but well ahead of the traditional asset classes .
Mathieu Vaissié, research engineer with the Edhec Risk and Asset Management Research Centre