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Hedge Funds Gain 1.7% in December, Reach Two-Year Peak

Date: Tuesday, January 11, 2011
Author: Kelly Bit, Bloomberg

Hedge funds returned 1.7 percent in December, rebounding from a November loss and ending 2010 at the highest level in more than two years as global equity markets rallied, according to data compiled by Bloomberg.

The Bloomberg aggregate hedge-fund index rose to 120.34, the highest since August 2008, amid optimism for economic growth. The gauge for the $1.8 trillion industry peaked at 130.38 in July 2007.

The December gain brought last year’s return to 7 percent on average, compared with a 7.4 percent rally in global stocks, as measured by the MSCI World Index, including dividends. Long- short equity funds, whose managers can bet on rising and falling stocks, increased 2 percent last month and 9.3 percent in 2010.

“December was a strong month for hedge funds, fueled by positive economic news,” said Don Steinbrugge, managing partner of Agecroft Partners LLC, a Richmond, Virginia-based consulting firm that advises hedge funds and investors.

Stock markets stabilized last month as higher-than- estimated growth in manufacturing and retail sales bolstered confidence in the U.S. economy and the Federal Reserve pumped cash into bond markets to safeguard the recovery. Speculation eased that a European Union nation would default on its debt, and a rally in energy and raw-material prices lifted shares in commodity-producing nations.

‘Prove Much More’

While hedge funds rose last month and in 2010, their failure to beat broad stock indexes may prompt investors to pull money if the industry doesn’t produce better returns next year, said Jacob Schmidt, founder of Schmidt Research Partners Ltd., a London-based hedge-fund advisory firm. The Standard & Poor’s 500 Index climbed 6.7 percent, the most for the U.S. benchmark in December since 1991.

“2010 came as a bit of a surprise to the industry, because it was a very fast recovery and most funds were defensive rather than aggressive,” he said in an interview. “Hedge funds will have to prove much more that they are worth the fees.”

Most hedge funds charge investors 2 percent of assets under management to cover costs and 20 percent of any profits.

Investors added $86.8 billion to hedge funds last year, according to industry researcher HedgeFund.net, and the rate of allocations increased “significantly” in the second half.

The HFN Hedge Fund Aggregate Index, an equal-weighted index of single-manager hedge funds and managed-futures products, gained 3.8 percent last month and 11 percent last year, the data provider said.

Macro Funds

Macro funds, whose managers seek to profit from global themes or trends, advanced 1.2 percent in December and 2.2 percent last year, Bloomberg data show. Brevan Howard Asset Management LLP’s $25 billion Master Fund, the world’s biggest macro fund, declined 0.5 percent in December and was up 1 percent for all of 2010.

Multi-strategy hedge funds gained 1.4 percent last month to pare losses for the year to 2.9 percent.

Funds seeking to profit from price inefficiencies of mortgage securities had the smallest gain in December, 0.1 percent, and the largest advance of the year, 24 percent. Among the best-performing funds of that type was Don Brownstein’s Structured Servicing Holding LP, which returned 50 percent through Oct. 31, according to Bloomberg data.

Equity statistical arbitrage hedge funds had the only December loss, at 4.3 percent, cutting the category’s return for 2010 to 0.4 percent.

The main Bloomberg hedge-fund index is weighted by market capitalization and tracks 2,662 funds, 1,008 of which have so far reported returns for December.

--With assistance from Michael P. Regan in New York, Matthew Kelly in Princeton, New Jersey, and Jesse Westbrook in London. Editors: Edward Evans, Francis Harris.

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

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net