Credit concerns re-emerged in November as the US sub-prime problems worsened, leading to large-scale risk aversion by investors. This had a negative impact on hedge fund performance, resulting in the Eurekahedge Fund of Funds index ending the month down 1.5% .
CTA FOFs emerged as winners, finishing the month in positive territory (0.6%). These gains came on the back of decent performance of underlying CTA managers, who benefited from currency and commodity-linked trades during the month. Fixed income FOFs ended the month flat (-0.2%), as hedge funds of the strategy made some gains from rallying bonds, thereby offsetting losses from other allocations. Arbitrage FOFs were also among the least negative, as underlying arbitrageurs exploited market volatility to minimise losses.
Long/short FOFs managers lost 2.2%, as most long/short single-managers ended the month down, owing to tremendous volatility across global equities. Special situation trades were also negatively impacted by the volatility across equities, which goes some way in explaining the performance of event driven FOFs (-2%). Multi-strategy FOFs ended down 1.4%, as did most single-manager strategies.
North American FOFs registered the least negative returns (-0.7%), as some hedge funds that made decent gains from shorts in equities, among other things, gave multi-managers decent opportunities to offset their losses suffered from other strategies. Emerging market and Asia-Pacific funds were down 2.7% and 2.5%, as underlying hedge funds were impacted by declines across domestic equity markets. Asia saw the largest draw-downs in November.
European funds ended down 3.1% owing to high volatility across regional equities, poor earnings outlook in the UK coupled with unhealthy performance of some names in the commodity and financial sectors.
Hedge funds and FOFs have returned 13.1% and 9.5% for the year-to-November. Healthy corporate fundamentals (except financials) and strong potential for M&A activity in the near future, keeps our outlook positive for hedge funds.
On the interest rate front, with the Fed contradicting its previous stance of growth and inflation risks being balanced, and cutting both - the target rate and the discount rate by 25bps on 11 December, as well as leaving a window open for further rate cuts should need arise, it will be interesting to see how it tackles inflation. Such moves, and the impact they have on the broader markets, should continue to pose lucrative opportunities for hedge funds on the long and the short side, both now, and in time to come.
For the latest November 2007 returns and 2007 YTD returns for the Eurekahedge hedge fund and fund of funds indices, visit www.eurekahedge.com/indices or contact firstname.lastname@example.org to comment on this report. Rajeev Baddepudi is hedge fund analyst with Eurekahedge in Singapore