The largest losses occurred in the S&P Directional/Tactical and S&P Arbitrage Indices as many of the factors that contributed to economic bullishness such as low inflation, surging corporate profitability and accommodative economic policy are now predicted to weaken from previous levels, S&P said.
“Increased investor concern over financing conditions is producing a difficult investment environment for credit related securities,” said Charles Davidson, Senior Hedge Fund Specialist at Standard & Poor’s, in a news release. “S&P research shows a general trend in portfolios toward higher cash balances and a more defensive position higher in the capital structure.”
The S&P Directional/Tactical Index retreated by 1.48% in April as all three of its broad underlying strategies – Macro, Managed Futures and Equity Long/Short – experienced varying levels of negative returns, the news release said. Macro managers in April were hurt by range bound trading of energy prices, the decline in equity markets and uncertainty over the decoupling of the Chinese Yuan to the US dollar.
The S&P Managed Futures Index gave up 6.51% for the month as the majority of the assets in this strategy are managed by medium to long trend-followers who were adversely affected by several trend reversals. Gains in financial futures, especially those inEurope, were offset by losses in currency, energy and metals positions.
A decline in the majority of world equity markets, with the exception ofAustralia’s commodity driven market and a few others, negatively impacted equity long/short managers during the month, the news release said Small-caps, particularly in the United States, were hit the hardest in April. Small-cap performance is key to many managers in the space as they often search for long ideas in this less researched area of the capitalization range, while hedging market risk in the more liquid mid- and large-cap area, S&P said. As a result, managers have begun to reduce their net market exposure. The net result, as indicated by the S&P Equity Long/Short Index, was a loss of 1.93% in April.
The S&P Arbitrage Index lost 0.61% in April led by poor performance in Convertible Arbitrage. Many managers in this strategy noted that this was the most difficult month in several years, but see opportunities for value-based investors as some bond names trade below fair value. The post GM spread blowout in high yield, which represents a high percentage of converts, also hurt valuations.
The S&P Event-Driven Index gave back 0.49% for the month as its three underlying strategies declined in April. Special Situations and Distressed were hurt by a general widening of spreads and increased investor caution. Merger Arbitrage was negatively impacted by concerns over the ability of private equity and other financial buyers to access reasonable financing as spreads widened.
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