During a year marked by double digit losses for equity indices, hedge funds have demonstrated an attractive risk-return profile. The Credit Suisse/Tremont Hedge Fund Index, an asset-weighted benchmark of the hedge fund industry, gained 4.09% between July 2007 and June 2008 compared to a loss of 12.5% for the MSCI World Index and a 13% loss for the S&P500 during the same period.

“While early estimates indicate that July was a difficult month for managers, certain hedge fund strategies have historically shown the ability to recover during periods of market turmoil and we hope to see a similar rebound in these strategies in the third quarter,” notes Credit Suisse.

During the 12-month period convertible arbitrage and fixed-income arbitrage were adversely impacted by world events, however, the losses were offset by gains in global macro and managed futures, diminishing the impact of negative performance in the asset-weighted portfolio. Managers of arbitrage strategies delivered disappointing returns due to the flattening of the yield curve while global macro posted gains as volatility provided opportunity for managers to trade in a variety of economic and market conditions.

source: Credit Suisse/ Hedge Fund Strategies and Returns  During Major Financial Crisis

“High market volatility has typically created burgeoning opportunities for global macro managers and funds investing in the space have benefited from elevated futures activity, currency plays and uncertainty surrounding central bank decisions,” according to the report. Managed futures strategies, on the other hand, profited as energy prices provided an alternative in an environment of equity sell-offs and credit turmoil.

The two largest sectors, long/short equity and event driven, which account for 53% of the index, were flat to slightly positive. Dedicated short managers, which make up only .5% of the index and have therefore not been a primary driver of returns for the industry, returned 21% for the year ending in June. Equity market neutral strategies, which exploit quantitative trading opportunities during times of market volatility, also performed well, returning 7%.

Hedge funds specialising in emerging markets also performed well as many of them experienced strong economic fundamentals and currency strength.

“While analysing previous periods of market turbulence provides insight into the performance of hedge funds during extreme market downturns, it remains impossible to foresee which individual strategies will drive performance in today’s constantly evolving investment landscape,” concludes the report. “Maintaining a diversified portfolio of hedge funds remains the best approach to accessing the downside protection and uncorrelated return streams that hedge funds may offer as managers continue to seek innovative methods of generating returns, regardless of broad market performance.”

VB