GLOBAL - Short biased managers were caught out in the face of a broad market rally, marking the fourth consecutive, negative month for the strategy.
Figures from the Hennessee Hedge Fund Index show that both short biased and fixed income strategies tied for the worst performers last month, posting –1.68%, or -14.31% and 1.22% year-to-date, respectively.
The sudden spike in interest rates caught many fixed income investors by surprise but, given the size of the spike, these managers did better than expected due to adequate interest rate hedges.
Overall, hedge funds produced a positive return of +1.24% in July, (+10.23% YTD), but still fell short of gains on broad market indices during the same period.
Financial equities was the top-performing index last month, with a return of +3.24% (+19.63% YTD), due to mortgage activity at record highs, strong fixed income issuance and rising trading volume.
“Hedge fund managers reluctantly increased their exposure to the equity markets as the S&P 500 second quarter earnings came in above expectations [65% beat earnings estimates],” said Charles Gradante, managing principal of Hennessee Group. He added that manager outlook was mixed due to the increase in fourth quarter earnings estimates, coupled with an underlying reservation in market fundamentals and what appears to be a liquidity driven market.
“Going into August, equity and fixed income hedge fund managers are alarmed by the back up in Treasury yields,” said Gradante.
“July’s spike in Treasury rates created problems for fixed income hedge fund managers, particularly mortgage-backs, who incurred incremental duration risk. Never in the history of fixed income markets has the duration for bonds extended as much in onemonth as it did in July.”
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