For the second month in a row, hedge funds posted losses with the HFRI Index, one of the most widely used benchmarks, showing a 0.20% decline in June. The decline was more pronounced in May with a 1.16% loss. For the first half of the year, hedge funds returned 6.14%, better than the S&P 500's 2.71% gain. But for the month of June, hedge funds underperformed both the stock and bond benchmarks, with the S&P 500 and the Lehman Brothers Aggregate Bond Index up 0.14% and 0.21% respectively. "Hedge funds had another difficult month in June, albeit not to the degree of May," says Wade McKnight, vice president of Greenwich-Van Advisors, a hedge fund database and index provider. Emerging markets were among the worst performers, losing 1.02% for the month, according to HFRI, continuing a trend that began in May. Part of the problem with emerging-market managers was that they have ties to the commodities market, which suffered both in May and June. One notable exception was the performance of hedge funds investing in Latin American markets, which gained 3.26% in June. According to the MSCI Hedge Fund Index, another widely used index, two of the worst strategies for June were fixed-income, with a loss of 1.09%, and long-bias, with a 2.61% negative return. Long-bias hedge funds have predominantly long positions, not hedged with shorts, and are thus more vulnerable to market declines. Among the winners: Short-sellers and real estate hedge funds performed well, with returns of 1.65% and 1.47%, respectively, according to HFRI. Also,
convertible arbitrage is definitely a strategy that has recovered from a two-year crisis. "As equity and commodity markets have entered a period of increased volatility, this strategy, along with others of the arbitrage or relative value strategies, is in position to perform well," said Peter Laurelli, research analyst at Channel Capital, a company that provides another index, the HFN Hedge Fund Aggregate Index, which was down 0.14% in June.
Merger arbitrage also did well, posting a 1.04% return for the month, according to HFRI. The strategy benefited from a healthy quarter in terms of deals, as the second quarter was the third-most-active quarter for merger activity since 1985. During the second quarter, mergers and acquisitions totaled $916 billion worldwide, up 35% from the second quarter of 2005. Some of the most newsworthy deals announced in the second quarter include Anadarko Petroleum ( APC) acquiring Kerr-McGee ( KMG) and Western Gas Resources ( WGR) for $23 billion; Johnson & Johnson ( JNJ) buying Pfizer's ( PFE) consumer-brand business for $16.6 billion in cash; and Mittal Steel ( MT) purchasing France's Arcelor for about $33.84 billion in cash and stock.
last month and were not able to fully participate in the broad market rally near the end of June," says McKnight. And adjusting to the market in a timely fashion is key to performance. "A lot of hedge funds were caught in the wrong side of the risk equation," said Jack Ablin, CIO of Harris Bank. "They were having too much risk when the market was dropping and not enough when the market came back."