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Hedge Funds Off to Best Start in Six Years

Date: Wednesday, April 11, 2012
Author: Juliet Chung, The Wall Street Journal

Hedge funds are off to their strongest start since 2006, with the average fund gaining 4.94% in the first quarter, according to data released Monday.

But the industry’s performance still trailed U.S. stocks, which posted their strongest first-quarter gains in more than a decade this year. The Dow industrials ended the quarter up 8.1%.

The first-quarter performance follows three straight years in which industry performance lagged behind stock-market returns, and the industry’s performance was basically flat in March, according to Hedge Fund Research Inc., which released the data.

Investors say stocks and other securities aren’t moving as much in lock step as they were for much of last year, when so-called correlation made it harder for funds to place bets based on companies’ performance relative to others.

“The first quarter is characterized by fundamentals taking hold, unlike last year, when policy issues dominated,” says Girish Reddy, a managing partner of Prisma Capital Partners LP, a fund of hedge funds with $8 billion in assets.

That was true across areas, including in credit, bonds, mortgages and equities, Mr. Reddy says.

Some strategies fared better than others. Funds trading in equities and event-driven funds posted bigger gains, with the HFRI Equity Hedge Index gaining 7.3% in the first quarter and the Event Driven Index, 4.5%. Coming in with the weakest numbers was the average macro fund, which was up 1.2% over the same period.

The challenge going forward is to negotiate a more volatile environment, says hedge-fund manager Reza Ali, whose Prosiris Capital Management LLC, which manages $160 million and focuses on structured credit, is up more than 10% in the first quarter. Unexpectedly weak jobs numbers and questions about the health of Spain’s and Portugal’s economy introduce uncertainty into the market, he says.

The jobs report triggered the recent decline in the Dow, which dropped 130.55 points, or 1%, to 12929.59 on Monday.

The first-quarter rally following the European Central Bank’s long-term refinancing operation was “low-hanging fruit” that hedge funds should have captured, Mr. Ali says. “The question is, what do you do now?”