Early View of Last Month from FRM

Fund of funds manager Financial Risk Management (FRM) produces a monthly “Early View” reviewing the hedge fund and market themes and sector performance for the previous month. 

The highlights for April 2012 were:

“We had been concerned that the hedge funds with low market beta were too slow to rebuild risk through the first three months of this year, but the reward for prudence has been apparent through April when these hedge fund managers benefited from their cautious positioning and focus on capital preservation.

Looking ahead, we anticipate that managers with short horizon, tactical trading styles are likely to weather thecurrent environment well. Credit and Equity Long-Short managers across regions have been finding more things to do despite the macro headwinds. We believe that the increase in dispersion will benefit these managers and allow them to build more balanced books.”

Strategy summary for April 2012

Directional Trading
• Early estimates show that Systematic Trading managers ended the month in positive territory despite the intra-month volatility. The main contributor to performance was long exposure to bonds. The largest detractor for the month was long exposure to equity indices.
• Discretionary Trading managers produced a wide range of returns. Overall, managers have retained a low level of risk and have focused on short duration, tactical trading.

Equity Long-Short
• Despite the strong intra-month reversals, the average Equity Long-Short manager produced flat returns. Overall, net and gross exposures stayed at the same level though managers tended to refresh the ideas in their books. Towards the end of April managers generally covered the shorts that had worked well at the start of the month.
• The latest earnings season data has surprised on the upside in the US; some select longs in Financials were contributors in April (eg JP Morgan). US Equity Long-Short managers are increasingly focusing on domestic names over international companies in an attempt to capture the regional outperformance.
• European Equity Long-Short managers generated decent returns despite the comparatively weaker earnings data. Managers have cited the increase incorporate activity and company-specific news as the main drivers. 

Specialist Credit
• The early estimate data suggests that Specialist Credit managers are likely to end the month with flat to positive returns. Refinancing events are expected to be a positive contributor in April. Bearish managers with short exposure to European sovereigns and financials are also likely to have had a strong month.
• US credit markets appear to be showing signs of de-correlating from Europe. This is a positive for managers as it allows them to benefit more from company-specific drivers rather than macro factors. An example of this is US new issuance which has continued to be robust despite the increased concern over European sovereigns.

Relative Value
• Relative Value managers posted mixed returns in April. Event Arbitrage managers struggled to add value as deal activity continued to be muted. Those involved in special situation deals also tended to suffer mark-to-market losses.
• Performance was flat in aggregate for Convertible Bond Arbitrage managers. Valuations came under pressure as outright investors became net sellers for the month. The increase in volatility, however, was positive for gamma trading.
• Statistical Arbitrage managers also ended the month flat. Early estimates indicate that, technically-oriented models (eg Momentum) tended to outperform fundamentally-oriented models (eg Value). Some managers reduced the allocation to their value-driven models during the month in line with their risk management