Philippe Malaise, EDHEC Business School.
The financial crisis that began more than a year ago now, after the sudden fall in the price of investments backed by sub-prime loans sent shockwaves through the markets, with unprecedented writedowns of asset values continuing to undermine the foundations of the banking system and leading to a pronounced economic slowdown. The great increase in risk aversion ultimately led to great adjustments in the stock markets. Since the initial falls in June 2007, the major stock market indices have posted losses in the double digits. Volatility has increased abruptly; in the first quarter of 2008, it was twice its second-quarter 2007 low. At the same time, credit spreads have widened greatly, throwing high-yield bond indices into a free fall, while, conversely, government bonds attracted renewed interest, despite inflationary threats. In this environment, one of instability, to say the least, analysis of the results posted by the major alternative strategies since the summer of 2007 takes on particular interest, all the more so in that many hedge fund managers play up their ability to withstand crises and to offer returns uncorrelated with those of conventional asset classes.
The results for the EDHEC alternative indices are mixed, but, all in all, they are largely in line with expectations, given the characteristics of each investment style. Although some strategies have certainly profited from recent turbulence in the capital markets, easily outperforming the risk-free rate from July 2007 to June 2008, the majority post less spectacular results, closer to zero and, in some cases, they are even negative.
Of the beneficiaries of this period of turbulence, short sellers are by far the top performers (+24.82% from July 2007 to June 2008). This performance is a result of their negative beta (stock markets were in the red two of every three months during these 12 months of activity). With a cumulative return of +17.73% for the period, commodity trading advisers (CTAs) have also done well. Short-term funds managed to take advantage of increased market volatility. For their part, trend followers, overall, benefited from the September/October 2007 rebound then, after having flipped their positions, from the bear markets of January 2008. In addition, they profited amply from the rise in commodity prices, the mid-February to mid-March fall of the dollar, and changes in interest rate trends.
A fair number of macro funds had something to celebrate as well (+10.64% on average from July 2007 to June 2008), although results in this category range widely. Most managed to limit or avoid losses at the most critical moments (August and November 2007, January and March 2008), all while maximising gains during upturns (temporary) in the stock markets (September and October 2007 in particular). Many macro managers also profited from spikes in commodity prices and from the ups and downs on the bond markets.
Equity market-neutral strategies likewise managed to emerge from this volatile period with a positive score (+5.94%). Despite their beta-neutral approaches and their profiles as pure generators of alpha that, as the assumption has it, offer persistent positive returns with low volatility, their performance should not mask the fact that they too can fall, as shown by their -1.12% January drawdown, when capital was transferred en masse to risk-free assets.