Hedge Fund Performance in 2008

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  • 1. An EDHEC Risk and Asset Management Research Centre PublicationHedge Fund Performance in 2008 February 2009

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Table of Contents About the Author...................................................................................................................................3 Market Environment .............................................................................................................................4Hedge Fund Return Analysis ..............................................................................................................5Convertible Arbitrage .....................................................................................................................6CTA Global ..........................................................................................................................................6Distressed Securities .......................................................................................................................6Emerging Markets ............................................................................................................................6Equity Market Neutral ....................................................................................................................7Event Driven ......................................................................................................................................7Fixed Income Arbitrage ..................................................................................................................7Global Macro .....................................................................................................................................7Long/Short Equity ............................................................................................................................8Merger Arbitrage ..............................................................................................................................8Relative Value....................................................................................................................................8Short Selling ......................................................................................................................................8Funds of Funds ..................................................................................................................................9Hedge Fund Risk analysis ..................................................................................................................11Methodology ........................................................................................................................................ 12 About the EDHEC Risk and Asset Management Research Centre .................................... 14 EDHEC Position Papers and Publications .................................................................................... 16 Published in France, February 2009. Copyright EDHEC 2009 The ideas and opinions expressed in this paper are the sole responsibility of the author.2 3. Hedge Fund Performance 2008 February 2009 About the Author Vronique Le Sourd has a Masters Degree in Applied Mathematicsfrom the Pierre and Marie Curie University in Paris. From 1992 to1996, she worked as a research assistant in the Finance and Economicsdepartment of the French business school HEC and then joined theresearch department of Misys Asset Management Systems in SophiaAntipolis. She is currently a senior research engineer at the EDHECRisk and Asset Management Research Centre. An EDHEC Risk and Asset Management Research Centre Publication 3 4. Hedge Fund Performance 2008 February 2009 Hedge Fund Performance in 2008 We analyse twelve years of data on EDHEC crisis spread. In October alone, the S&P 500 Alternative Indexes for different hedgelost about 17%. Heavy losses (about 9% fund strategies to provide some perspectiveand 7% respectively) were also observed on their performance. The extraordinaryin September and November. Losses such events of 2008 were not without an impactas those of last October are extremely rare, on hedge fund returns. Funds of hedgeand are greater than any that have been funds lost 17% in 2008, posting their worstobserved in the last decade. For example, annual returns since we began keepingduring the Russian crisis of August 1998, records in 1997. Hedge fund investmentsthe S&P 500 fell 14.5%. In September lost value across the board. Except for CTAs 2001, it fell about 8% and one year later, in and Short Sellers, all strategies posted their September 2002, about 11%. The veritable worst losses in 2008.plunge of stock markets in 2008 comeson the heels of fair performancea total Even after the impact of a calamitous year,return of 5.49% for the S&P 500in 2007. half the strategies still post cumulativeAt the end of December 2008, the index returns above 100% for the past ten years, was at its lowest since September 2003. that is, a compound annual return above 7%. Interestingly, Distressed Securities The volatility of returns was also funds and Emerging Markets funds are considerably higher in 2008 than in 2007, the strategies that have the highest returnwith a standard deviation of 21.02% of over the past ten years, even though theythe S&P 500 monthly returns, compared were among the biggest losers, with returnsto 9.66% in 2007 and to 5.64% in 2006, of -19% and -30%, in 2008. On the othera year in which we observed the lowest hand, Short Sellers have the lowest ten-year volatility of the decade for the S&P 500 returns of all the strategies, even afterindex, together with very good performance returning 25% in 2008. of about 16%. The volatility observed in2008 is nearly as high as any since 1997, In 2008 investors were given a painful and comparable to that of 1998, 2001 and reminder that hedge funds are exposed2002, years of turbulent stock markets. to a variety of risk factors, such as credit risk, liquidity risk and several equity risk Emerging markets were hit with even factors. Historical estimates of volatilitygreater losses. For example, the S&P IFCI and Value-at-Risk now suggest greaterIndex, which includes twenty-two emerging risk for hedge funds as risk measures have markets, fell by about 54% in 2008; increased across strategies when takingthis index had posted returns between into account the data for 2008.35% and 40% over the three previous years(2005-2007).Market Environment Government bonds are typically 2008 was characterised by very negativeconsidered a safe haven in times of performance in global stock markets. turbulent markets. In addition, central The S&P 500, for example, fell 37%, thebanks around the world cut interest rates greatest one-year fall for the period wherein 2008. The government bond market data is available (starting in 1964). Most ofthus performed well. The Lehman Global this fall took place in the last months of US Treasury Bond, for example, posted the year, as news of the worsening financial returns of 13.74%, higher than the 9.01%4 An EDHEC Risk and Asset Management Research Centre Publication 5. Hedge Fund Performance 2008 February 2009 Hedge Fund Performance in 2008 returns of 2007. After the substantial 40% with a return of 24.72%. The lowest return progression of 2007, commodity prices(-30.30%) was obtained by Emerging fell considerablyby about 43%, to April Markets, closely followed by Convertible 2005 levels, as measured by the S&P GSCI Arbitrage (-26.48%). Commodity Spot Index.Five of the strategies (Convertible Arbitrage,Distressed Securities, Emerging Markets, Hedge Fund Return Analysis Fixed Income Arbitrage, and Funds of All hedge fund strategies except for CTA Funds) now present a negative average Global and Short Selling posted negative return for the period from 2006 to 2008, returns, and all these negative returnsand only four (CTA Global, Global Macro, were their worst returns since the 1997Merger Arbitrage, and Short Selling) have creation of the indices. Not once since 1997 produced an average return above 5% for have so many strategies (eleven) postedthis same period. Only the two strategies such deeply negative returns at the same that performed positively, CTA Global time; previously, no more than three and Short Selling, present higher average strategies had been in the red in anyperformance for this recent three-year one year. Funds of hedge funds,period than for the last ten years. All other which are sometimes taken to givestrategies, except Merger Arbitrage, have an aggregate view of the industrysdone considerably worse over the short performance, performed very badly in term (the past three years) than over the 2008, with a strong negative average long term (the past ten years). The short- return of -17.08%, the first time sinceterm performance of Merger Arbitrage 1997 that this index has posted negative is only slightly worse than its long-term returns. The months of September and performance. October were the major contributors to the negative performance for all the strategies. The volatilities of the strategies, as shown But other months contributed as well, as by figures higher for the last three years most of the strategies racked up morethan for the last ten years, have increased negative than positive months; indeed, recently. Only for CTA Global and Short six strategies (Convertible Arbitrage, Selling is volatility higher over the long Distressed Securities, Emerging Markets, term than it is over the short term. Event Driven, Fixed Income Arbitrage,For the period from 2006 to 2008, and Funds of Funds) posted negativevolatility figures range from 4.42% for returns for as many nine months in 2008. Merger Arbitrage to 13.73% for Emerging December, on the contrary, provided an Markets. For the ten-year period, the opportunity for a slight recovery for arange is wider, from 3.17% to 17.74%, majorit