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Performance mixed as interest rates rise

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The final month of 2006 was characterised by rather strong performance of the stock markets, which was again above average, but in decline compared to the value observed during the previous months, while volatility remained below its historical mean value. After five months of positive values, bond markets fell sharply, leading to quite a significant negative return, which may be explained by an increase in interest rate levels. Commodity prices continued to fall and reached their level of December 2005.

In this environment, all strategies delivered positive returns and were strongly above their average historical performance. The range of returns between the strategies is relatively narrow, with only a 0.56 point difference between the two extremes. The best-performing strategy is event driven with a monthly return of 1.65%, closely followed by long/short equity with a monthly return of 1.56%. The lowest return is the 1.09% reported by equity market neutral, with CTA global only slightly better at 1.19%.

Although it was one of the two most poorly performing strategies for the month, CTA global managers performed quite well; almost as well as the previous month. The decline can be explained by the poor performance of bond markets. Convertible arbitrage managers improved their performance compared to the month before.

The three equity-oriented strategies exhibited varying behaviour, but performance was good for all three of them due to the positive performance of the stock markets. While market neutral improved its return compared to the previous month, the other two - event driven and long/short equity - exhibited a decrease, which reduced the difference in performance observed during the previous two months between equity market neutral and the other two strategies.

Mathieu Vaissié is research engineer with the Edhec Asset Management Centre

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