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Against a backdrop of lacklustre performance in almost all markets (eg, stocks, bonds and commodities), and more generally, of a decline in the risk appetite of investors, all hedge fund strategies performed negatively in October, for the first time since April.
Unsurprisingly, the strategies most harshly hit by the fall in the stock markets, -1.77% for the S&P 500), bond markets (-1.26% for the Lehman Global Bond Index), and commodity markets (-9.94% for the Goldman Sachs Commodity Index) were the (bi)-directional and semi-directional strategies. With a -1.78% average return, long/short equity funds were the worst performing funds in October. These funds were particularly affected by the poor performance of small cap stocks (ie, -3.21% for the S&P 600, and -2.23% for the S&P 400). Event driven strategies were also strongly negatively impacted by the negative premium paid to small cap stocks (underperformance of -1.43% of the S&P 600 relative to the S&P 500), and the widening in credit spreads (the yield difference between a Baa- and an Aaa- rated bond increased by 4.30 to 0.97%).
Like long/short equity funds, event driven funds achieved their worst performance since July 2002, namely
-1.72%. Similarly, CTA global funds suffered from the bearish stock, bond and commodity markets, and could only limit their losses thanks to bets on interest rates (eg, flattening of the yield curve), and/or currencies (eg, rally of the US dollar versus the yen, and the euro).
Relative value strategies were the only strategies to post almost flat returns. Indeed, with -0.03%, equity market neutral funds were the best-performing funds in October. Finally, despite the widening credit spreads and significant cash outflows, convertible arbitrage funds were able to limit their losses by taking advantage of the increase in stock markets’ implied volatility (ie, the VIX contract was traded at 15.32, its highest level since October 2004). They were thus able to end the month with an average return of -0.12%.
Mathieu Vaissié is research engineer with the Edhec Risk and Asset Management Research Centre

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