Hedge Funds Recoup 2008 Losses in Second Quarter, HFR Says

Date: Tuesday, June 3, 2008
Author: Tom Cahill, Bloomberg.com

Hedge funds almost recovered since March from the worst start to the year in about two decades, according to Hedge Fund Research Inc.

HFR's Global Hedge Fund Index rose 1.4 percent in May, adding to a 1.2 percent gain in April, and trimming the decline for this year through May 29 to 0.2 percent, the Chicago-based researcher said on its Web site today. The measure of returns in the $1.9 trillion industry dropped 2.8 percent in the first quarter.

Hedge funds benefited as volatility eased in the past two months from the highest in five years in March. The measure was helped by arbitrage funds that gained after transactions such as Clear Channel Communications Inc.'s buyout moved closer to completion, sending shares higher.

``Some people may have prematurely started writing obituaries for the hedge-fund business,'' said Stephen Oxley, managing director of Pacific Alternative Asset Management Co. in London, which has about $10 billion invested in hedge funds. ``I've been around long enough to have heard several times the cry that `this is the end of hedge funds as we know them'.''

Arbitrage funds, those that bet on a difference between prices, got a lift on May 22, when Clear Channel said banks had fully funded the debt portion of its transaction to be bought by firms including Bain Capital LLC and Thomas H. Lee Partners LP. Highfields Capital Management LP and Third Point LLC are among hedge funds that hold Clear Channel shares, according to filings with the U.S. Securities and Exchange Commission.Merger arbitrage funds in May had their best month since October.

All Strategies Gain

While all eight hedge-fund strategies tracked by HFR gained in May, only three have advanced in the year to date. Macro strategy funds, which can make bets ranging from commodities to currencies and interest rates, led gains with a year-to-date, climbing 11 percent, HFR data shows.

The Global Hedge Fund Index is based on returns from more than 2,000 funds and is published with a two-day delay, according to HFR's Web site. HFR said it tries to tries to limit so-called survivorship bias, a gain resulting from the exclusion of funds that have failed when they are liquidated.

More than a dozen hedge funds have closed, need cash infusions or have been liquidated this year. Peloton Partners LLP folded in March after wrong-way bets on mortgage securities.

``There's still a huge amount of uncertainty out there,'' said Sophia Brickell, an investment specialist at GAM in London, which runs $28 billion in funds of hedge funds, who expected 2008 to be a ``weed-out year'' for hedge funds.

Still, some measures of investor concern have eased. The Chicago Board Options Exchange Volatility Index, the benchmark for U.S. options prices, has fallen by almost half in two months. The cost of protecting European debt from default is half what it was in March, according to the iTraxx Europe Index of credit-default swaps.

``We're seeing a break from the big losses out there and that's a good start,'' said Cambiz Alikhani, who helps manage hedge-fund investments for Iveagh Asset Management, the investment arm of the Guinness family brewing fortune.

To contact the reporter on this story: Tom Cahill in London at tcahill@bloomberg.net