Alternative fund returns increased in April following an improvement in market sentiment across most asset classes, including equities, bonds and currencies.
For the month, the Eurekahedge Hedge Fund Index was up 1.5 per cent. The majority of equity markets internationally saw good gains whilst the credit market also lifted following another cut in rates by the United States Federal Reserve in an attempt to arrest slowing economic growth.
However, for the year to date, the overall index is still down by one per cent.
Particularly good gains were seen in Japanese markets, up by more than four per cent. In part this was due to exceptional gains from some warrant-investing index constituents. However, long short equity strategists also saw good gains.
Other Asian markets performed positively for the month. Both India and Hong Kong saw strong increases of more than five per cent, following weakness in the first quarter. China-focused hedge funds also performed well, rising by 4.5 per cent for April. Overall the Asian index is still down by nearly eight per cent for the year.
Latin American hedge funds recorded a further gain, rising by 1.9 per cent, with Brazilian equities performing well, aided in part by raising of the country's rating to investment grade.
Latin American funds is the only region to record a positive return for the year to date, up by one per cent. US hedge fund managers rose by 1.7 per cent on the month, making a good portion of their gains from equities. However, short trading strategies in equities and in the US dollar (mainly against the euro and the yen) eroded some gains from the managers' portfolios during the month. European hedge funds returned 1.4 per cent, again on the back of stronger equity markets.
Asset mix moved heavily to equities in April and most major equity markets globally had a strong month. The Morgan Stanley World Index was up by five per cent, with its emerging markets component recording gains of just under eight per cent. North American equity indices rose by five per cent. Japan's Index rose 12 per cent in April, as banks and consumer electronics stocks performed impressively. Indian shares, after declining over 20 per cent in the first quarter, posted a gain of 10 per cent in April, as the risk of a global financial meltdown decreased during the month.
Persistent concerns on inflation added to the stress on the fixed income markets in April. Treasury yields in the US rose during the month; yields on the 10-year treasury note and the 90-day treasury bill rose by 33 and seven basis points, respectively. The currency markets witnessed a noted appreciation in the dollar, as signs of the Federal Reserve halting its rate cuts brought about expectations that the US would be able to weather the credit crisis.
Commodity Trading Advisers and Managed Futures continue to perform well. Crude oil rallied again to touch a record high during the month. CTA/managed futures hedge funds are up by more than eight per cent for the year, by far the leading hedge fund strategy thus far. The only other hedge fund strategy to record a positive return for the year to date is Global Macro, rising by two per cent. In contrast, long/short equity is down by four per cent, relative value down by 3.5 per cent and distressed debt 2.5 per cent.
Arbitrage and relative value managers finished the month of April up 0.7 per cent and 0.3 per cent respectively, amid an environment of lower volatility (as compared to the past few months) and tighter credit spreads across the board.
North American arbitrageurs and relative value managers recorded gains for April although mergers and acquisition activity remained weak due to the continued difficulty in obtaining funds for leveraged deals. Rallying convertibles and improvements in financial stocks aided the gains. Relative value managers allocating to the Asia-Pacific region recorded a strong gain of 2.4 per cent in April. Australia-focused managers made some good gains from statistical pair trades across the banking, property and infrastructure sectors.
In terms of regional mandates, the best performing long/short managers were those allocating to Asia. Those allocating to Asia ex-Japan were up 3.3 per cent in April, on the back of sharp increases across equities in Hong Kong and India, among other regions. Indian managers turned in gains to the tune of 6.6 per cent, largely benefiting from long positions in sectors such as software, telecoms and financials. Taiwan-focused funds returned 3.9 per cent with gains on financial stocks realised during the month as equities rallied.
April saw a marginal increase in the overall assets of the hedge fund industry, as performance-based flows rose by $4 billion (Dh14.7bn), but were offset by investor redemptions of about $1.7bn during the month. In terms of regional mandates, North America- and Asia ex-Japan-focused managers recorded the highest performance-based increases in assets, amounting to $1.9bn and $1.2bn, respectively.
The main performance-based increase in terms of strategic mandates has been in long/short equities and in long-only absolute returns strategies ($3bn and $0.9bn, respectively).
Asia ex-Japan and Latin America-focused managers saw some inflows in April, summing up to about $540 million and $150m. Most of the inflows into Asia ex-Japan were in long/short equity managers. CTAs, which outperformed throughout most of the first quarter of 2008, saw the biggest inflows ($700m) during April. In addition, most of the inflows into CTAs were seen across North America.
The outlook for hedge funds in both the remainder of May and June is encouraging and there should be more gains recorded, although relatively modest. Market participants have a varied outlook on most asset classes, which should create pricing inefficiencies in the near term. These pricing inefficiencies, however, work to the advantage of managers employing short-term trading strategies such as arbitrage and relative value.
Equity markets have generally remained in a more positive trend, although there may be some profit taking. However, this will benefit short traders. Commodity trading will also remain positive with volatile markets, mainly on an upward trend, providing profitable trading conditions.