Hedge fund performance in August was characterised by loss mitigation and short-term trading. The composite Eurekahedge Hedge Fund index shed 1.3%, even as global commodities (CRB) and equities (MSCI World) dropped 6% and 1.6% in value. Funds of hedge funds recorded losses averaging 1.6% in August.

Long/short equities (-2.1%) and macro (-2.4%) recorded the largest losses during August. These losses can be explained by the poor performance of underlying hedge funds, which were affected by the high volatility and declines in equities.

CTA and multi strategy funds of funds were down 1.4% and 1.5% respectively. Considerable losses for both strategies came from exposure to commodity-investing managers.

Arbitrage funds of funds (-0.3%) were flat; gains from investments in European arbitrageurs offset most of the losses suffered from investments in managers allocating to other regions. Relative value funds of funds (-2.1%), suffered large losses from their exposure to convertible arbitrage managers.

Fixed income funds of funds also finished flat (-0.3%), due to rallying bond prices. Opportunistic strategies like distressed debt and event driven, on the other hand, lost 1% and 0.9% respectively. Underlying distressed debt hedge funds were negatively impacted by shrinking volumes and risk appetites in a quiet high yield market that saw wider credit spreads in August.

While all regional mandates also recorded losses during the month, North American funds of funds were the least negative (-0.9%), as bets in favour of the US dollar, among other things, helped regional hedge funds offset losses suffered from other allocations. Japanese funds of funds (-1.1%) also saw regional hedge funds offset some losses with profits from currency trades, during the month.

In Europe, multi-managers lost 1.8% on average, against a 1.4% loss among hedge funds; while most funds of funds posted returns in line with the region's average. Funds of funds in the Asia Pacific region were down 2.2%, with the most losses coming from investments in long/short managers; this can be explained by negative returns between -3.8% and -13.6% in equities in China, Hong Kong and Japan. Likewise, emerging market funds of funds turned in losses averaging 3.8%, with those investing in long/short hedge funds down 5.7%; sharp downturns across some equity markets took a toll on the performance of emerging market equity-focused hedge funds.

For the latest monthly returns and 2008 returns for the Eurekahedge hedge fund and fund of funds indices please visit www.eurekahedge.com/indices or contact editor@eurekahedge.com to comment on this report. Rajeev Baddepudi is hedge fund analyst with Eurekahedge in Singapore.