Hedge Fund Focus

Relative Value Strategies Achieving Strong Performance as Fundamentals Return to Markets, According to Mellon Capital Management

Relative value investment strategies, including those employed by quantitative funds, have produced strong returns since the end of December 2008, when the movements of various asset classes became much more correlated with key fundamental indicators such as corporate earnings and corporate credit spreads, according to an analysis by Mellon Capital Management Corporation, part of BNY Mellon Asset Management.

“This trend has become very strong since December,” said Eric Goodbar, managing director and hedge fund strategist, Mellon Capital Management. “Before December, the behavior of these asset classes was driven by extreme fear in the marketplace. While the return to fundamentals has benefited relative value strategies, strategies focused on momentum have generally not benefited from this trend. We have seen substantial divergence as relative value funds have significantly outperformed other quantitative trend-based classes such as Commodity Trading Advisors (CTA).”

Relative value investors are willing to bear some level of risk for an appropriate reward. They typically base their decisions on the expected returns from stocks, bonds and currencies and often invest in these asset classes throughout the world. CTAs are more likely to add value when prices move without regard to fundamental data. This often happens when stress events hit the markets and investors shed risk taking exposures — pushing aside the knowledge about expected returns from stocks, bonds and currencies.

From December 31, 2008 through May 31, 2009, the HFRI Relative Value (Total) Index*, which measures the performance of relative value funds, has returned positive 11.79 percent versus negative 0.95 percent for the Barclay CTA Index*, which measures the performance of CTA funds and positive 2.96 percent for the performance of U.S. equities, as measured by the Standard & Poor’s 500 Index.

Founded in 1983 by innovators in the investment management field, Mellon Capital Management applies a disciplined and analytical approach to global investment management strategies. As of March 31, 2009, the firm had $138.5 billion in assets under management, including assets managed by dual officers of Mellon Capital Management and The Bank of New York Mellon, and $11 billion in overlay strategies. The company is part of BNY Mellon Asset Management, one of the world’s largest asset managers.

BNY Mellon Asset Management is the umbrella organization for The Bank of New York Mellon Corporation’s affiliated investment management firms and global distribution companies.

The Bank of New York Mellon Corporation is a global financial services company focused on helping clients manage and service their financial assets, operating in 34 countries and serving more than 100 markets. The company is a leading provider of financial services for institutions, corporations and high-net-worth individuals, providing superior asset management and wealth management, asset servicing, issuer services, clearing services and treasury services through a worldwide client-focused team. It has $19.5 trillion in assets under custody and administration, $881 billion in assets under management, services more than $11 trillion in outstanding debt and processes global payments averaging $1.8 trillion per day.