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Hedge Funds Decline in November Amid Europe Debt Crisis, Stock Market Drop

Date: Monday, December 6, 2010
Author: Kelly Bit, Bloomberg

Hedge funds declined the most in six months in November as the European debt crisis pushed stock markets lower across the globe.

The Bloomberg aggregate hedge fund index fell 1.5 percent, the most since May, when a sudden selloff in stocks known as the “flash crash” prompted investors to cut risk. Long-short equity funds, whose managers can bet on rising and falling stocks, dropped 1.6 percent last month and gained 6.1 percent since the start of the year.

Global stocks slumped 2.3 percent in November amid concern Europe’s debt turmoil may engulf Spain and Portugal after a bailout of Ireland failed to persuade investors that the crisis will be contained. Standard & Poor’s said last week it may cut Portugal’s credit rating. Prime Minister Jose Socrates has rejected suggestions the country may need a bailout.

Europe is “on the verge of collapse,” James Melcher, founder of New York-based hedge fund Balestra Capital Partners LP, said last week at the Hedge Funds New York conference, organized by Bloomberg Link. “Germany may leave the euro with a couple of stronger countries.”

The main Bloomberg hedge fund index is weighted by market capitalization and tracks 2,627 funds, 1,198 of which have so far reported returns for November. The index fell to 116.71 last month, compared with a peak of 130.38 in July 2007.

Lagging Behind Stocks

The November losses pare returns this year to 3.8 percent on average, compared with a 6.7 percent rally in global stocks, as measured by the MSCI World Index. Stock markets stabilized in the second half, helped by the U.S. Federal Reserve’s decision to buy an additional $600 billion in Treasuries to lower borrowing costs and stimulate the economy.

Macro funds, whose managers seek to profit from global themes or trends, failed to profit from the dislocations in Europe, declining 1.1 percent in November. They’re still up 2.1 percent this year. Multistrategy hedge funds fell 1.5 percent last month to bring gains for the year to 1.7 percent.

“The European debt crisis and QE2 are both having some unpredictable impacts on asset pricing,” said Adam Sussman, the New York-based director of research at Tabb Group LLC.

‘Difficult Month’

Hedge funds investing in asset-backed securities had the biggest November loss of any strategy, falling 5.2 percent, for a year-to-date return of 15 percent.

Hedge funds that aim to capitalize on the price inefficiencies of fixed-income securities gained the most of any strategy, increasing 0.2 percent last month and 11 percent since the start of the year.

Funds seeking to profit from mergers and acquisitions decreased 2.3 percent in November and 0.2 percent this year.

“November was a difficult month for hedge funds,” said Don Steinbrugge, managing partner of Agecroft Partners LLC, a Richmond, Virginia-based consulting firm that advises hedge funds and investors.

To contact the reporter on this story: Kelly Bit in New York at kbit@bloomberg.net