HSBC hedge fund market commentary - July 2005
HSBC's hedge fund research analysts provide their latest review of the factors that drive the different hedge fund strategies that they monitor. <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
Equity markets in June
There was a lack of earnings news in June, however, markets across the globe traded up. In <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Europe, this looked to be due to the potential for an interest rate cut in the region and the positive aspects on European companies of a weaker Euro.
However, the US continues to be in a tightening cycle with no consensus on when this may end. The mid-cap and small-cap segments of the US market outperformed large-cap stocks as consumer sentiment numbers were strong and companies are more insulated from the big picture macro stories. This encouraged investors to return to a space that had been heavily sold after the volatile events in equity markets in March to May.
Globally, company fundamentals remain fairly robust with few signs of distress, however, the macro economic picture suggests a global economy that, whilst not nearly in recession, is starting to show signs of slow down.
Bond markets in June
US fixed income markets traded within a tight range over the month. June began with economic numbers painting a fairly tame inflationary picture, causing fixed income markets in the US to fall.
However, towards month end, the durable goods orders report showed a decline (once the outsize aircraft orders were discounted) that also coincided with the oil price hitting USD 60 a barrel. This level acted as a psychological barrier for many and investors became concerned regarding the future economic picture, resulting in investors purchasing US Treasuries.
On the last day of June, the Fed hiked rates for the 9th time in succession. The language from the Fed was broadly unchanged and, whilst the policy remains "accommodative", more rate hikes are on the agenda.
In Europe, markets became focused on a potential interest rate cut by the ECB. The month began with the ECB keeping rates on hold, however, the president Jean-Claude Trichet refused to expressly rule out a potential interest rate cut. This was followed by the surprise move from the Swedish central bank; cutting rates 50bps.
Later in the month, the minutes from the Bank of England's most recent meeting showed two out of nine of the committee voted for an interest rate cut and, in the meantime, the economic news out of Europe was fairly weak. All the data pointed towards a soft demand backdrop for the region supporting the need for an interest rate cut. The only conflicting factor came from the recent weakness in the Euro supporting exporters in the region. There was a downward shift in European yield curves with a steepening at the short end as investors began to price in a potential interest rate cut.
In Japan, fixed income markets continued to rally; the curve flattened over the month as short term expectations remained unchanged, whilst the weak economic outlook for the country continues to favour investors purchasing bonds.
Individual hedge fund strategies
Key drivers of performance: Equity Market Level - Neutral
Equity Market Rationality - Neutral
Equity long/short managers that took advantage of the market rally by increasing the gross and net exposure of the portfolio generated some strong returns in June. European, Asian and emerging market managers continue to offer the most attractive returns in a less crowded space with underlying equity markets looking cheaper than the US. The HSBC outlook for both of the drivers of the strategy is neutral and the outlook for the strategy is also Neutral.
Equity long/short Neutral
Equity market neutral Neutral
Statistical arbitrage Neutral/Positive
Convertible arbitrage Neutral
Merger arbitrage Neutral
Fixed income arbitrage Neutral/Negative
Managed futures Neutral
High yield/Distressed Neutral/Negative
Event driven/Multi-strategy Neutral
Background notes: Strategy ratings represent HSBC Republic Investments Limited's assessment of the outlooks for the different hedge fund strategies relative to each other.
A neutral rating means that the expected outlook for performance over the next 3-6 months is broadly in line with the longer-term expectations of return for the strategy.
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