“If past history was all there was to the game, the richest people would be librarians”
- Warren Buffet
Performance
Hedge funds out performed the major equity indices in July and year to date. The Greenwich Global Hedge Fund Index ("GGHFI") returned -2.3% in July. In contrast the S&P 500, MSCI World Equity, and ASX 200 indices posted returns of -0.8%, -2.5% and -4.56%, respectively in July. Year-to-date, the GGHFI has returned -3.0%, whilst the S&P 500 Index, MSCI World Equity Index and S&P/ASX 200 have year-to-date returns of -12.7%, -14.0% and -19.7%, respectively.
Market Neutral Group managers were the strongest performers in July, posting a loss of -0.88%. Merger Arbitrage and Statistical Arbitrage funds lead the group with positive returns of +0.59% and +0.85%. Convertible Arbitrage funds were the weakest within the group as managers saw spreads decrease. Directional Trading Group funds experienced their largest decline so far this year primarily due to weakness among CTA/Futures managers who shed -3.22% on average. Long/Short Equity Group funds also suffered as Growth and Value managers posted declines of -3.31% and -2.32%, respectively. Short Sellers added to their significant year-to-date gains by returning +0.30% on the month. Finally, Emerging Market funds once again posted the greatest losses (-3.7%) as they declined in step with global equity markets.
|
Greenwich Alternative Investments Hedge Fund Index |
|||||||||
Total Return |
3 Yr Annual |
5 Yr Annual |
|||||||
Index |
Jul 08 |
Jun 08 |
YTD |
3 Month |
1 Year |
CAR |
STD |
CAR |
STD |
| Global Hedge Fund | -2.3% |
-1.0% |
-3.0% |
-1.5% |
-0.3% |
8.2% |
5.4% |
8.9% |
4.9% |
| Global Long/Short | -2.6% |
-2.1% |
-5.3% |
-2.3% |
-2.8% |
7.9% |
6.9% |
9.4% |
6.4% |
| Global Market Neutral | -0.9% |
-0.0% |
-0.5% |
0.6% |
0.8% |
7.4% |
3.1% |
7.2% |
2.9% |
| Emerging Markets | -3.7% |
-4.2% |
-11.3% |
-6.4% |
-6.4% |
13.3% |
10.5% |
16.4% |
9.5% |
Benchmark |
Jul 08 |
Jun 08 |
YTD |
3 Month |
1 Year |
CAR |
STD |
CAR |
STD |
| Lehman Bond Index | -0.1% |
-0.1% |
1.1% |
-0.9% |
6.2% |
4.4% |
2.7% |
4.6% |
3.2% |
| S&P 500 Index | -0.8% |
-8.4% |
-12.7% |
-8.0% |
-11.1% |
2.9% |
10.1% |
7.0% |
9.5% |
| MSCI World Index | -2.5% |
-8.1% |
-14.0% |
-9.4% |
12.7% |
4.8% |
10.8% |
9.0% |
10.1% |
| ASX 200 | -4.56% |
-7.46% |
-19.7% |
-10.3% |
-15.6% |
8.7% |
13.0% |
14.4% |
11.1% |
| CAR= Cumulative Average Return, STD = Standard Deviation | Source: Greenwichai.com |
Markets
July saw one of the worst performances in equities for a long time as the credit crisis continued to roll out and through economies and sectors. Volatilities rose at start of July, peaking at 28% in mid month before falling to end July at 23% (see VIX chart below). The Australian Dollar fell slightly against the US dollar and most major currencies in July with rises in the US Dollar compounding an expectation of a rate cut in Australia being factored into the market.
Sentiment
Based on the recent Macro Managers survey, the Managers revealed that they hold a slightly bearish view on equity indices in August with views in equity indices evenly divided as 40% hold a bullish position, vs. 40% bearish and 20% neutral. However, the Managers held a bullish outlook for the US Dollar and anticipate it will continue moving higher; 70% hold a bullish view for August, vs. 20% bearish and 10% neutral. Finally, the Managers are neutral on US treasuries for August, with 50% of the group neutral on the U.S. Treasury 10-year Note vs. 30% bullish and 20% bearish.
Credit Crisis
Freddie Mac and Fannie Mae, two Government Sponsored Enterprises (GSEs) that hold or guarantee mortgages in the US are teetering on the edge of collapse, with a government rescue being the only possible outcome. Credit rating agency Moody’s has downgraded the ratings on the companies' preferred stock by five notches to one notch above junk status. A few observations: Firstly, downgrades of five notches are extremely rare; they tend to be one notch at a time. A downgrade of this magnitude reflects a very rapid deterioration in these agencies’ credit profiles.
Second, these two mortgage giants between them issue and guarantee some $5tr of mortgages. To explore what would happen if they collapsed; it may be instructive to look back at the S&L crisis of the 1980s. During that crisis, as a rule of thumb, depositors received 100 cents in the dollar, bond holders received 20 cents in the dollar and equity holders received less than 5 cents in the dollar. Incidentally, the 25 cent to the dollar figure is also the price of sub prime bonds sold by Merrill Lynch recently. Under the 25 cents in the dollar scenario, that is a loss of $3.75Tr.
That magnitude of loss would reverberate around the world as many banks and investors around the world hold the bonds of these two entities, believing they carry an (implicit) government guarantee. As an example, central banks around the world own $925bn of Fannie Mae and Freddie Mac debt. That said, Freddie Mac and Fannie Mae are Government Sponsored Enterprises and it may be that a loss of that magnitude is impossible and that the US government will guarantee the bonds as to 100 cents to the dollar.
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Funds of hedge fund portfolios are battening down the hatches in the current volatile markets by building up cash or steering clear of strategies with too much exposure to market movements.
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Trends
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US pension funds upping hedge fund stake
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Hedge fund invests in GHG credits to bury carbon
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General
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For the diary
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