New Credit Suisse/Tremont Hedge Fund Index Research Paper Explores Hedge Fund Performance During Market Downturns
New York, August 14, 2008 Credit Suisse Index Co. today released a new research piece, Seeking Returns in Turbulent Markets: The Case for Hedge Funds During Market Downturns, which posits that hedge funds in general have customarily exhibited trends of correlation in bull market runs and some de-correlation at market downturns. A comparison of the Credit Suisse/Tremont Broad Benchmark Index (HEDG), an asset-weighted broad benchmark of the hedge fund industry, to the MSCI World Index, a broad equity index, shows that the 12-month rolling correlation between the two has dropped from its peak of 0.97, in June 2006, to 0.61 in June 2008. Between July 2007 and June 2008, HEDG increased by 4.09% compared to a decrease of 12.5% in the MSCI World Index and a decrease of 13% in the S&P500.
The report discusses the concept that certain hedge fund strategies have historically performed well or have mitigated losses while some strategies have been adversely impacted during periods of market dislocation. The report also discusses how past trends may be playing out in the current market environment. Some of the salient suggestions include:
Parallels may be drawn between the current market downturn and the events of the Asian financial crisis and the Russian debt crisis that sparked the collapse of Long Term Capital Management which were both marked by dramatic increases in equity market volatility caused by a reduction of liquidity within the markets;
Certain strategies have recently emerged wherein managers were able to manage losses; and
Dominant return strategies have shifted over the course of previous market dislocations and there is no way to accurately predict which sectors will be able to capitalize on market events going forward, reinforcing the precept that diversification is fundamental when considering investing in hedge funds.
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