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Equity hedge drives HFRI July gains on earnings and M&A

Hedge funds posted gains across equity hedge, event driven and relative value arbitrage strategies in July, as most strategies reversed losses from the prior month on strong earnings, acceleration of M&A activity, moderating concerns of a sharp rise in interest rates and receding macro risks.

The HFRI Fund Weighted Composite gained 1.4 per cent for the month, the highest monthly performance since January, according to data released by HFR.
The HFRI Equity Hedge Index led strategy performance in July with a gain of +2.5 per cent; equity hedge gains were broad based across sub-strategies, sparked by strong earnings reports by Starbucks, Facebook and US Financials and led by HFRI technology/healthcare, energy/basic materials and fundamental value strategies. The HFRI Equity Hedge: Technology/Healthcare Index gained 4.0 per cent in July, the best monthly performance since September 2010, while the HFRI EH: Energy/Basic Materials posted a gain of 3.7 per cent, the best monthly performance for energy focused funds in 18 months. Fundamental value strategies added 3.3 per cent in July, with contributions from US, European and Asian exposures, as well as from US consumer, financial and energy sectors. With the July performance, equity hedge surpassed YTD performance of event driven, leading all main strategy indices with a 7.7 per cent gain.
Event driven strategies also gained in July, with the HFRI Event Driven Index up 1.5 per cent, reversing the 1.1 per cent decline of the prior month. Event driven performance was led by activist and special situations exposures, with these adding 3.8 and 1.8 per cent, respectively, in the month. Positioning across Sony, Dell, Apple, Yahoo and Herbalife, as well as M&A positions in Elan, Air Products and Publicis/Omnicom all contributed to performance gains. HFRI Distressed Index gained 1.4 per cent while the HFRI Merger Arbitrage Index advanced 1.0 per cent. Fixed income-based relative value strategies were also positive in July, as high yield credit tightened and concerns about sharp rise in interest rates associated with a near term extraction of stimulus measures by the US Federal Reserve subsided. The HFRI Relative Value Index gained 0.4 per cent for the month, led by volatility and asset backed strategies, which increased by 1.2 and 0.8 per cent, respectively.
Macro hedge funds posted their third consecutive monthly decline, with the HFRI Macro Index down 0.1 per cent. The HFRI Macro: Systematic Diversified/CTA Index declined 1.1 per cent for the month, with weakness from sharp reversals in commodity and currency strategies. Discretionary macro exposure in energy and commodity, as well as active trading strategies, had positive contributions, partially offsetting CTA losses.
The HFRI Fund of Hedge Funds Index also posted a gain of 1.3 per cent.  Despite recent capital outflows, the FOF Index has posted a YTD performance of 4.78 per cent, in line with the YTD gain of 4.73 per cent of the Fund Weighted Composite Index.
“In sharp contrast to the volatile, risk-off sentiment of the prior month, hedge fund performance in July was driven by a positive tone to earnings season and a dynamic environment for M&A including strategic transactions, shareholder activist and special situations exposures, contributing to a favourable operating environment for long/short strategies,” says Kenneth J Heinz, president of HFR. “While many managers continue to position for a gradual extraction of stimulus measures by the US Federal Reserve and correspondingly rising bond yields, fundamentally driven, valuation-oriented strategies produced strong results in July as risk-off sentiment moderated from the prior month and investor risk tolerance continued to normalise. While the risks associated with Fed tapering remain salient, managers are well positioned at present for the opportunities in EH and ED strategies, maintaining short portfolio duration, cautious high yield exposure and mixed exposure to commodities in order to remain flexible, tactical and opportunistic in 2H13.”

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