GLOBAL - Institutional investors considering hedge funds as diversification to declining equity, property or fixed income markets may need to think carefully about doing so as two new reports present conflicting results about the alternative asset class.

According to figures released by French business school Edhec, the hedge fund industry continued to resist the downturn in February as the stock and bond markets remain severely depressed, and this in turn helped hedge funds.

"After last October's record, the S&P index gave its second worst performance since September 2002. Similarly, the bond market registered another month of negative returns," the business school said.

"After its record performance in January of +5.61%, the convertible arbitrage strategy registered a third consecutive month of positive returns [in February] with +1.76%, in line with a depressed stock market and an increasing credit spread," it added. 

Despite the equity market downturn affecting equity-based strategies, Edhec revealed hedge funds continued to outperform by a considerable margin.

"The market neutral's -0.56%, event driven's -0.95% and long/short equity's -1.56% clearly outperformed the S&P index which returned -10.65%. And the short selling strategy is strongly on the rise as it recorded a second month of significant profit of +3.54% in February," Edhec claimed.

But fellow research specialists, Hedge Fund Research (HFR), appear to disagree about prospects for the hedge fund sector as it noted a record number of hedge funds went under last year, caused by record investor withdrawals totalling USD150bn (€111bn) during the final quarter of 2008.

"This equates to 778 funds liquidated during the period, more than doubling the previous quarterly record of 344 set just one quarter earlier. The total number of liquidations in 2008 was 1,471 - an increase of over 70% from the previous full year record of 848 in 2005," said Kenneth Heinz, president of HFR.

Similarly, funds of hedge funds also suffered as HFR found a record 275 FoHfs went under in 2008.

HFR added the same period also saw a sharp drop in the number of new funds entering the market, as there were only 56 launches for the last quarter of 2008 compared with 117 in Q3.

"For the year as a whole, there were 659 new funds launched - the lowest number since 2000's 328. Taken together, this means there are about 8% fewer hedge fund vehicles around now," Heinz continued. "The decline in hedge funds reflects the transitions occurring across many aspects of the overall financial."

Edhec presented figures in February revealing hedge funds suffered heavily in 2008, and the only strategy to deliver positive returns was short-selling. (See earlier IPE story: 2008 was a bad year for pressured hedge funds)

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