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The Eurekahedge fund of funds index ended February up 0.8% (based on 42.8% of the NAV for February 2007 as at 13 March 2007) doing reasonably well despite choppy markets towards the month's close, as equity markets worldwide witnessed sharp drops of between 4% and 9%.

The month's best returns came from opportunistic strategies such as event driven (+1.4%) and distressed debt (+1%). While the former took advantage of the continued strength in global M&A deal flow including several cross-border mergers, notably in India and Canada, as well as new issuance.

Latin America benefited from a high yield market that posted returns upwards of 1% for the eighth consecutive month. Though corporate bonds had been steadily appreciating, the sharp month-end equity correction spurred selling pressure in the corporate debt market. Credit spreads widened and equity market volatility spiked.

Equity long/short also posted decent gains (+1%) as the gains made early in the month absorbed the sharp correction towards the month's close.

Rallying bond markets, rising equity market volatility, and high levels of new issuance activity in the convertibles space all played catalyst to the performance of fixed income managers (+0.8%) and arbitrageurs (+0.8%) in February.

These sharp reversals across markets had an adverse effect on directional macro (-0.3%) and CTA/managed futures (-0.2%) funds, the only two strategies in flat, if not negative, territory for the month. While the impact of the month's key events was global, this did not take away from a familiar pattern of outperformance: emerging over developed markets.

Asia-centric funds of funds drew the best returns for the month (+1.2%) as gains during the earlier part of the month were that much more pronounced in the region's markets. While on average, fund of fund managers in the US, Europe and Latin America ended the month relatively flat, there were still pockets of returns in select strategies. Equity long/short funds in Latin America and Europe (+4.2% and +0.7% respectively), and multi-strategy funds in the US (+0.8%), helped shore up the broad regional averages.

In closing, the last few days of February marked the end of an equity market run up that started in mid-2006.

While the resulting spike in volatility and risk aversion may take some time to unwind, we view this is as a short-term correction, just as was the case in mid-2006.

From the perspective of hedge funds and funds of funds, the spike in volatility and M&A activity should drive valuations and offer profitable entry points, especially as market fundamentals for a number of emerging economies continue to look healthy.

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 www.eurekahedge.com/indices or contact editor@eurekahedge.com on this report

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