The month of January was characterised by favourable conditions in the stock markets. In particular, the global stock markets posted strong returns, though these were lower than the previous bullish month of November 2005. At the same time, stock market volatility, as measured by the implied volatility index VIX, remained below historical levels.
Moreover, the broad bond market posted negative returns. The credit spread (ie, the yield difference between Baa- and an Aaa- rated bonds) showed a slight decrease, continuing the trend it has followed since last November.
In this environment, all five major hedge fund strategies exceeded their long-term average performance in January. Most strategies benefited from the strong performance of the stock market and also the above average level of the size spread.
Long/short equity was one of the best performers with a monthly return of 4.0% and posted its third positive monthly return in a row. This result could be explained by the positive levels of the stock markets and the size spread but also stands against a low level of VIX and the commodity index.
Convertible arbitrage posted a performance of 2.56% this month, its third consecutive positive return. This strategy gained from its exposure to the strong equity markets but also from short-term interest rates being near historical levels and from the change in VIX, below historical levels. CTA Global reached a performance of 1.87% in spite of negative levels of bond returns and the commodity index being below historical levels.
Equity market neutral posted a return of 1.11% this month. This strategy gained from the good conditions in the global stock markets and short-term interest rates but also resisted against the low performance of the global bond markets. This strategy recorded a positive return for the ninth month in a row.
Mathieu Vaissié is research engineer with the Edhec Risk
and Asset Management Research Centre

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