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Hedge funds move into black

Date: Tuesday, March 10, 2009
Author: Louise Armitstead, Telegraph

After the worse year on record last year, hedge funds are making a controversial come-back by generating stellar returns on the back of falling financial stocks.

The Credit Suisse/Tremont Hedge Fund Index outperformed global equity indicies by 10pc in February and by 18pc since the start of 2009, according to new figures.

The best performing strategy for the past month was dedicated short bias which generated over 4pc returns in one month the strategy that concentrates on betting that stocks will go down.

The biggest fallers on global stockmarkets have been banks and insurance companies.

The correlation between the hedge funds' success and the demise of financial stocks will add fuel to the demands to re-instate the ban on the short-selling of financial stocks.

The ban on short-selling introduced in September to protect financial stocks from volatility was lifted in January.

Over the past month, Royal Bank of Scotland, the American insurance giant AIG, and Switzerland's UBS have all posted the highest corporate losses in recent times for their respective countries.

Peter Scott, finance director of Avivia, said: "Since the shorting of financial stocks was re-instated, hedge funds have again had the opportunity to speculate on beliefs and rumours regarding the capital position of insurers. This type of trading is not in the public interest as it drives unreasonable volatility."

However some of the hedge funds that have profited from selling financials have in recent weeks bought shares in British banks.

For instance, Lansdowne Partners recently bought a stake in RBS.

The $1.700bn (1,232bn) hedge funds sector ended the year with its worst performance ever, 1,000 liquidations and its reputation severely pruned.

Liquidations in the third quarter of 2008 rose by 70pc compared with the same period last year, according to the latest figures from Chicago-based Hedge Fund Research.