The huge equity gains in April were a welcome respite from recent volatility. A boon to index investors and long-only mutual funds, both of which were mauled by the market's downdraft that started in July, investors who weren't as affected by the deluge largely missed the rally.
Hedge funds are the best example. Preliminary data shows that most funds were up around 1%, which indicates that most alternative managers don't think the rally has legs. Similar returns were garnered by long-short mutual funds and other managers who are not required to keep a constant equity position in their portfolio.
Besides the "too soon, too quickly" mentality that many analysts seem to have, there is a genuine sense of mistrust with the Obama administration's handling of the current financial crisis. In the case of the TARP and Public Private Investment Program, the fear is that the government will change the rules of engagement as investment capital begins flowing into troubled debt securities–a move that could dramatically alter the return expectations for needed programs that could bring significant liquidity to the markets.
The recent Chrysler filing is certainly in the forefront of many investors' minds. By forcing debt holders to accept onerous terms in favor of equity holders and the UAW, Obama is reversing decades of bankruptcy law. These strong-arm tactics only add uncertainty in an environment that is desperately in need of confidence. The state of the economy is too tenuous for a game changing move like this one.
