Eurekahedge Weekly Commentary

Jun 23 2006 | 9:08pm ET

This week Eurekahedge analyst Rajeev Baddepudi takes a look distressed debt and fixed income funds. The following commentary courtesy of Eurekahedge.

Global financial markets took a steep fall in the second week of May, following an extended spell of benign to rising markets supported by encouraging corporate and economic data. The downdraft was largely attributable to heightened inflation worries coupled with the lack of clear guidance from the Fed and a weakening US dollar, which in turn exacerbated investor risk aversion. Interestingly, however, lowered risk appetites did not translate into rallies in the treasury markets, which continued their sell-off as 10-year yields rose a modest 5 basis points to 5.1% and 5-year yields rose 1 basis points to 5.03%.

The leverage deployed by hedge funds seems to be lesser than in the past, implying limited impact on fixed income markets. The yield curve continues to be relatively flat, as uncertainty in Fed policy and the search for safer assets support the long end of the curve. Furthermore, given that the markets worst-hit by the month's fall were those that saw the biggest jumps in the previous months (i.e. emerging markets, equities, commodities), North American hedge funds were actually the best (or rather the least negative) return-generating (at -1%[1] vs. -1.6% for the composite Eurekahedge Hedge Fund Index), among the regional indices.

Reflecting this, North American fixed income and distressed debt funds posted relatively flat returns for the month, marginally outperforming their respective global indices by 10-20 basis points. Distressed debt managers benefited from healthy activity levels in the high yields market s, while fixed income players found opportunities in the wide trading range of Fed Funds futures (given the uncertainty surrounding future hikes in the Fed rate).

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