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Even hedge funds were not spared

When blue-blooded Wall Street banks are going bust, can hedge funds be making hay? May be not.

The Credit Suisse/ Tremont Hedge Fund Index, which tracks the performance of hedge funds, has given a negative return this year.

According to the August edition of Lipper Hedge Funds Insight report, the index has fallen 2.1 per cent in the year-to-date. In July alone, the hedge funds made a negative return of 2.61 per cent. Over July, the average performance for the 6,700 hedge funds tracked by Lipper was a negative 2.60 per cent — 1 basis point above the Credit Suisse/Tremont Hedge Fund Index.

Deepesh Pandey, Co-Head-investments, IIFL Capital, which plans to launch India-focussed hedge funds early next year from Singapore says, “Hedge funds have fallen less. When the market is down by 30 per cent, they are able to restrict losses to minimum. That is no mean achievement.”

However, marginal as they may appear, the losses are significant since a negative return is against the essence of a hedge fund.

Hedge funds, unlike regulated investment vehicles such as mutual funds, can take big bets on a wide range of assets and specialise in sophisticated investment techniques. They can also play both sides, meaning they can go short on a particular asset class or stock and so on. Their focus is on absolute returns and they are expected to earn returns in falling as well as rising markets.

A major reason for the underperformance is the U-turn of oil. Equity trading had a bias towards ‘long commodity – short financial sector stocks’ strategy in developed markets. The strategy worked well when crude oil doubled in a year to $148 since the sub-prime crisis came out in the open. But since July, this trade has suffered as the fall in commodities and the resultant fund liquidations lead to a collapse in natural gas, crude oil and coal prices.

Aureliano Gentilini, Global Head of Hedge Fund Research, Lipper, says, “Hedge funds have seen their returns nosedive as the ‘long commodities – short financial stocks’ trade backfires and emerging market sinks.”

In the August edition of Lipper Monthly, Gentilini points out how the hedge funds have trailed even the US equities. “July was the notable for the poor relative and absolute performance of the Credit Suisse/ Tremont hedge Fund index against a number of traditional equity benchmarks. It was worse than the S&P 500 TR (total returns) Index and MSCI World TR Index by 177 bps and 20 bps, respectively.”

Over July, a majority of hedge fund sub-strategies (12 of the 13) posted negative performance. The best-performing hedge fund sub-strategy and the only one to post positive returns was the Dedicated Short-Bias. This strategy gave a return of 2.98 per cent, while the worst-performing sub-strategy was Managed Futures at (minus) 4.20 per cent.

Dedicated short-bias strategy seems to be the best under the circumstances. As of August, this hedge-fund strategy has earned 15.3 per cent YTD and 16.6 per cent on a 12-month rolling basis, making it the best performing hedge fund strategy during the period.

The Lipper report added, “While a few of the short situations across US financials were hurt, many managers maintained aggressive shorts against UK and other European financials, convinced that the combination of an economic downturn, together with ongoing balance sheet issues would continue to damage earnings growth over medium term.”

Source: Sify

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