Hedge Fund Returns Retreat in October

November 10, 2005 (PLANSPONSOR.com) - Standard & Poor's announced that hedge fund returns, as measured by the S&P Hedge Fund Index, lost 0.47% in October.

Year-to-date, the S&P HFI has returned 1.94%.

S&P said in its announcement that the loss seemed to be fueled by a reduction in risk appetite.
  “Hedge fund performance was influenced by a number of factors in October, most significantly by a substantial pullback in the global risk appetite as evidenced by widening risk arbitrage spreads and a sizeable retracement in the energy sector,” said Justin Dew, Senior Hedge Fund Specialist at Standard & Poor’s, in the announcement

The S&P Directional/Tactical Index lost 0.37% in October, as global energy related markets fell sharply during the month.   In the Equity Long/Short sector, long positions in energy-related stocks gave back earlier gains as the prices of the underlying commodities such as crude oil and natural gas fell after reports of better inventory numbers and an announcement out of OPEC that the heating needs for the winter season will be met.

The Macro sector saw gains during October, as some managers believed there to be a substantial likelihood of a near-term recession in the US.  In the Managed Futures sector, managers experienced losses as global equity markets reversed course earlier in the month (with the exception of Japan) causing problems for long positions in equities.  Toward the latter half of October, according to S&P, the dollar rallied versus both the yen and euro as interest rates began to point higher, yielding profits in long dollar positions, as well as in short bond positions.

The S&P Event-Driven Index lost 1.23% in October, as all three of its underlying strategies ended the month in negative territory.  After bankruptcy announcements by Refco and Delphi, the Special Situations sector suffered in October.

In the Distressed sector, manager returns were mixed as some were impacted by the news of the bankruptcies, while others were not.
  S&P reports that Distressed managers took advantage of the recent investor sell off by making selected additions to their portfolios during October.  In the Merger Arbitrage sector, risk arbitrage spreads widened dramatically in a few large deals as the likelihood of completion came into serious question, in particular the Guidant/Johnson & Johnson merger.

The S&P Arbitrage Index gained 0.22% in October led by the performance of fixed income arbitrage and equity market neutral sectors.  In the Fixed Income sector, modest gains resulted as the Federal Reserve Bank began to have a significant impact on interest rates.  Equity Market Neutral managers managed a slight gain in October, as the small-cap sector performed well.  In the Convertible Arbitrage sector, October was a rather flat month due in part to anticipated quarter-end redemptions in convertible bond hedge funds.