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S&P rally goes unexploited by hedge funds

Date: Thursday, April 9, 2009
Author: Anuj Gangahar, Financial Times

Hedge funds failed to take advantage of the sharp rally in equities in March as their generally defensive stance meant the average fund across all investment strategies gained less than 2 per cent even as the benchmark S&P 500 index rallied by more than 8 per cent.

Some hedge fund strategies completely missed the upside of the equity markets in what many analysts were describing as a bear market rally.

Many hedge funds have taken a step back from directional bets on the stock markets against the backdrop of the heightened volatility that has accompanied the financial crisis.

Many are under pressure for funding and have been subject to a wave of redemptions by investors. Some have invested large amounts in cash, while many multi-strategy funds have focused on opportunities beyond the equity markets, particularly in distressed debt and special situations.

According to figures from Hedge Fund Research, a weighted composite of hedge fund strategies rose 1.8 per cent in March. The S&P 500 rose 8.5 per cent over the same period while the Nasdaq Composite index rallied almost 11 per cent.

Many hedge funds posted negative returns for the month. For example, the HFR macro hedge fund index was down 1.2 per cent for the month. The bestperforming hedge fund strategy groups were those focusing on energy and basic materials. But even these funds failed to the match the gains in the broader equity market, rising about 5 per cent for the month.

March began with a challenging week for equity markets in which the benchmark S&P reached a 12-year low and fell to 57 per cent below its October 2007 peak.

But positive news regarding the early-year revenues from Citigroup and other financial institutions sparked three weeks of sharp rallies in the leading US equity market indices.

These were accompanied by similarly powerful equity rallies across the globe and were given further momentum by positive revenue announcements from other troubled banks as well as the US government's proposal to buy toxic assets from financial institutions and other upbeat indicators.

Long/short equity managers, the largest strategy group in the hedge fund business, displayed a wide dispersion in performance as many were defensively positioned going into the rally.

Their overall performance of 2.3 per cent was low as a result compared with the broader equity markets. Not surprisingly, the HFR dedicated short bias index was down 4.9 per cent for the month, after staging two strong months in January and February. Multi-strategy funds captured upside participation with a return of 1.6 per cent for the month.