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HFs End Bad Year on Up Note

Date: Friday, January 9, 2009
Author: James Armstrong, Hedge Fund Correspondent, Markets Media Online

Hedge funds were up slightly in December with some new funds being founded, but still finished the year with double-digit losses, according to industry trackers Hedge Fund Research and the Hennessee Hedge Fund Index.

Hedge funds returned on average 0.42 percent last month, according to data released Thursday by HFR. Hedge funds lost 18.3 percent for the year, still better than the S&P 500, which lost about 38 percent in 2008.

Data from HedgeFund.net confirms a positive month for hedge funds in December. According to Peter Laurelli, vice president of HFN's parent company Channel Capital Group, preliminary numbers suggest hedge funds returned 1.55 percent in December, though he expects that number to go down somewhat as more funds report their data.

The Hennessee Hedge Fund Index was up 0.51 percent in December and down 19.15 percent for the year, again well outperforming the S&P 500.

Macro funds continued to perform well last month. The HFR Macro Systematic Diversified Index returned 2.33 percent in December, ending the year up 18.28 percent. The Hennesse Macro Index was up slightly less, 2.06 percent for December.

"The month's gains were primarily in the macro and the relative value spaces," said Kenneth Heinz, president of HFR. Event driven and equity strategies were more of a mixed bag for December. "Certain areas were positive and certain areas were negative," he said.

Short bias funds got squeezed in December, losing 2.04 percent, according to HFR. Data from HFN and Hennessee showed a similar but smaller loss for short funds. With the overall decline in the stock market, however, that was not enough to prevent short bias funds from becoming the top performing hedge fund category of 2008, returning 28.35 percent, according to HFR.

Hedge funds investing in energy and basic materials had a good December, returning 1.72 percent, HFR reported. Overall, however, they were one of the worst performers, losing 36.93 percent in 2008, according to the firm's numbers. Only hedge funds investing in Russia and Eastern Europe did worse, losing more than half of their value over the past year.

"It's been tough going over there," said Heinz. "The economic instability which has developed in the last few months I think is largely a function of the weakness in the oil and natural gas markets, and that has precipitated a bit of a destabilized macro situation with them taking steps to try to stabilize the value of the currency."

HFR said some of their indices were impacted by exposure to Madoff Securities. Among other things, the Madoff madness brought down fund-of-funds, which lost 0.18 percent in December, according to HFR. Funds-of-funds ended the year down 19.97 percent, their worst performance on record.

"We have the funds-of-funds composite about half a percent lower because of that," said Heinz. "The Madoff situation is incremental to the pressure which was already there, and I do see that pressure continuing three to six months or so."

Heinz added that Madoff Securities was neither a hedge fund nor a fund-of-funds, but several funds appear to have been victimized by Bernard Madoff's alleged $50 billion fraud.

The down year for hedge funds has not stopped new funds from starting up. Recently, Boaz Weinstein left as co-head of global credit trading for Deutsche Bank, and he is reportedly planning on setting up his own hedge fund firm.