Hedge Funds Showing Positive Signs

Hedge funds registered their best performance since February with a return of 1.1 percent for the month of July, but the performance still lagged the 1.4 percent gain of the Standard & Poor’s 500-stock index. The underperformance of hedge funds in relation to the S&P 500 index was even more pronounced in the first seven months period since the start of the year during which its 2.9 percent average return trailed the 11 percent return of the S&P 500 index.

Long Biased Hedge Funds Underperform

Hedge funds that employed managed futures strategies influenced the industry’s performance most positively in July with a return of 2.44 percent due in part to the return of strength in the US dollar. However returns from such funds year-to-date for the seven month period till July were smaller at 1.45 percent. Hedge funds with directional equity strategies especially those with a long bias lagged significantly in July and barely managed to generate positive returns for the month with gains of only 0.14 percent. Macro concerns such as the continuing uncertainty in the Eurozone and disappointing employment figures in the US contributed to muted returns from long biased equity hedge funds.

Hedge Fund Managers on the Defensive

According to Hennessee Group, which advises investors on various hedge funds, the continued underperformance of the hedge funds versus the broader market is a result of conservative stance of fund managers while positioning themselves in light of the continuing Eurozone crisis. Charles Gradante, managing principal of Hennessee states that some managers are utilizing ETFs, which detracted from performance in the sharp late month rally in July.

Technology, Healthcare Among the Laggards

For the month of July, hedge funds that concentrated their investments on technology and healthcare companies reported a negative return of 0.42 percent. However year-to-date these funds are up 3.35 percent.  But hedge funds focused on energy companies and commodities generated a strong 2.06 percent return in July though year-to-date these funds are down 5.75 percent. Fixed income-based relative value arbitrage hedge funds reported another strong performance in July with returns of 2.32 percent. For the seven month period since January, these hedge funds are up 9.69 percent.

The total hedge fund capital at the end of the most recent quarter declined to $2.10 trillion from $2.13 trillion at the end of Q1 as the hedge fund industry suffered a 2.7% loss in the second quarter of 2012.  Despite a modest improved performance in July, hedge fund managers continue to be conservative and adopt a cautious approach in light of the difficulty in predicting long-term trends. Such a conservative approach is likely to keep a lid on any spurt in the hedge fund job market in the near-term.

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