All strategies except for CTA global exceeded their long-term average performance in December. Convertible arbitrage was the only strategy to end the year with a negative cumulative performance. Interestingly, the average performance of the hedge fund industry, proxied by the performance of the Edhec funds of funds index, was almost identical to that obtained in 2004 (ie, 7.08% as opposed to 7.07%).
Despite somewhat less favourable market conditions in December compared to November (ie, US stock markets lagged behind and the size spread slid into negative territory), both directional strategies (ie, long/short equity), and semi-directional strategies (ie, event driven) pursued their upward trend. They both achieved their second best performance of the year after that of July. While long/short equity funds were able to take advantage of their long bias on Asian stock markets, event driven funds managed to benefit from a slight decrease in credit spreads, and from the flattening of the yield curve.
Relative value strategies (ie, convertible arbitrage and equity market neutral), also ended the year with a good performance. Convertible arbitrage funds took advantage of the downward trend in stock markets as well as the slight decrease in credit spreads, together with a small increase in stock markets’ implied volatility. They obtained their fifth positive return for the second half of 2005.
Like long/short equity, equity market neutral funds did not enjoy a particularly favourable environment. Nevertheless, they succeeded in posting their eleventh positive return for 2005.
The good shape of commodity markets could not make up for the lack of pronounced trends on major markets. CTA global funds therefore posted their worst performance for the second half of the year in December.
Mathieu Vaissié is research engineer with the Edhec Risk and Asset Management Research Centre

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