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EDHEC report reveals one positive strategy in April

June 1, 2005
- 7:13 am

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The latest data from EDHEC suggests that the only hedge fund strategy that yielded positive returns in April was short selling.

The month was characterised by poor

The latest data from EDHEC suggests that the only hedge fund strategy that yielded positive returns in April was short selling.

The month was characterised by poor stock market performance. Negative returns were accompanied by a sharp rise in stock market volatility, though the current levels are still relatively low when compared to the average of past years. Small cap stocks suffered in particular in the month of April. Value stocks also underperformed the aggregate market, though to a lesser degree than small company stocks.

The conditions for the bond markets were favourable as reflected by positive returns over the month of April. Against this backdrop, 12 out of 13 strategies had negative returns. The only strategy that yielded positive returns was short selling.

Convertible Arbitrage funds posted negative returns for the fourth month in a row. Over the month of April, managers in this strategy had average returns of -3.25 per cent. Their disappointing performance is partly due to poor equity market conditions, as well as low levels of short-term interest rates.

CTA managers performed disappointingly over the month of April, with returns of -3.51 per cent on average. Against the backdrop of a steep decline in commodity prices and low levels of implied volatility on the stock market, this does not come as a surprise. Favourable conditions on the bond market probably avoided an even more negative outcome for this strategy

Distressed Securities funds returned -0.45 per cent in April. This poor result may be explained by the fact that Distressed managers had to deal with a negative stock market environment over the month of April, as characterised by rising volatility, negative returns, and particularly poor performance for small company stocks.

Emerging Markets hedge funds posted a return of -0.7 per cent in April. This poor result can be explained by the poor performance of stocks, and of small cap stocks in particular. Rising levels of implied volatility over the month were also unfavourable to emerging markets hedge funds.

Equity Market Neutral funds showed low returns of -0.36 per cent. With these results, market neutral managers are some of the few that avoided more significant losses over the month of April. Market conditions were difficult for these managers as levels of implied volatility were rising and small-cap stocks and the stock market in general experienced losses.

As would be expected, Event Driven funds faced some difficulties against a backdrop of declining stock markets. Managers in this strategy posted returns of -1.39 per cent over the month of April. In addition to negative equity market returns, Event Driven funds had to deal with rising volatility. Low levels of the credit spread and the fact that implied volatility remains low compared to the past avoided more pronounced losses for this strategy.

With a return of 0.00 per cent in April, Fixed Income Arbitrage remained below its historical average returns. Low levels of volatility in the bond and stock markets gave some support to Fixed Income managers. While volatility has risen in the stock markets, levels remain historically low and in the bond market volatility actually declined from low levels over the month of April.

With returns of -0.77 per cent, Global Macro managers remained far below their historical average return. This is mainly due to the negative conditions on the stock market. This poor result comes despite positive returns in the bond markets over the month of April. Low levels of bond and stock return volatility helped to avoid even more negative results for this strategy.

Long/Short Equity hedge funds posted a return of -1.72 per cent in April. While negative equity market conditions meant a difficult month for Long/Short Equity funds, this poor result may be surprising since the low levels of short-term interest rates and a low credit spread observed in April typically mean positive news for these managers.

Merger Arbitrage managers posted returns of -1.06 per cent on average in April. This negative result comes in spite of low levels of the spreads in the bond markets (term spread, credit spread) which is usually positive news for these managers. On the other hand, given the negative equity market conditions and rising levels of implied volatility it does not seem surprising that Merger Arbitrage managers posted significantly negative performance in April.

Relative Value hedge funds posted negative returns of -1.11 per cent in April. While a low credit spread and low levels of implied volatility should have helped these managers, negative stock returns and low interest rates clearly hurt their performance.

With a return of 4.01 per cent, short selling hedge funds are the only strategy to post positive returns over the month of April. This is explained by the fact that the negative stock market conditions observed over the month of April typically help these managers.

Annual

average Annual std.

return since dev. since

April 2005 inception inception Sharpe

Investment Strategies (est) YTD* (Jan 2001) (Jan 2001) Ratio

Convertible Arbitrage -3.25 -6.1 6.2 4.2 0.52

CTA Global -3.51 -7.8 6.3 10.2 0,23

Distressed Securities -0.45 -1.6 14.4 4.2 2.47

Emerging markets -0.70 2.2 14.3 8.1 1.28

Equity Market Neutral -0.36 1.4 5.7 1.5 1.14

Event Driven -1.39 0.0 9.0 4.6 1.07

Fixed Income Arbitrage 0.00 1.5 7.1 1.8 1.67