Funds of hedge funds had a third consecutive month of strong returns, closing the year 2006 on a very positive note; December returns averaged 1.8%1 , bringing the 2006 returns of the Eurekahedge Fund of Funds Index to 9.9%. Market performance during that month was driven chiefly by long exposure to equities (as strong economic growth and continued high levels of M&A activity drove equity prices higher during the month), short exposure to energies (as mild weather in the US and Europe resulted in lower demand) and profitable plays in the foreign exchange markets.

Sustained merger activity levels also helped opportunistic strategies (such as event driven) generate robust returns (+1.5%). Indeed, performance was broad-based across strategies, as reflected in the 1.8% returned by multi-strategy funds of funds during the month. Even the strategy with the least returns for the month (CTA/Managed futures, affected as these funds were by the lower-than-expected seasonal demand for oil and gas) posted reasonable gains at 0.8%.

We see the same trend played out in a comparison of the performance of various fund of funds strategies for
the year 2006. Distressed debt
(11.8%) and event driven (10.4%) funds posted the best returns for 2006, followed by equity long/short (9.9%), relative value (9.7%) and directional macro (8.5%), while multi-strategy funds of funds returned 10.1%.

In a year that saw significant activity (new issuance as well as secondary
markets) in the M&A and high-yield arenas, the superior performance of opportunistic strategies such as event driven and distressed debt can be easily explained. Arbitrage and relative value players, on the other hand, benefited from the spikes in volatility owing to the strong market correction seen mid-year (between May and July), in addition to the general uncertainty surrounding inflation and the Fed's rate hike decisions.

The Eurekahedge Emerging Markets Fund of Funds Index had one of its best years since inception (in 2000), with December returns alone at 3.3% and 2006 annual returns at 20.1%. These returns were in part driven by a substantial influx of liquidity into the emerging markets in Asia, Latin America and Europe.

1 Based on 48.34% of the NAV for December 2006 as at 19 January 2007

Based on 48.34% of the NAV for December 2006 as at 19 January 2007

Rajeev Baddepudi is hedge fund analyst with Eurekahedge in Singapore. For the latest returns for the Eurekahedge hedge fund and fund of funds indices please visit or contact on this report