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Hedge funds continued their negative streak for the sixth month in a row, falling 0.8% as November saw the continuation of several of the dominant themes from September and October: distressed selling, deleveraging and redemptions among hedge funds, heightened volatility and an increasing disconnect between asset prices and underlying fundamentals, and economic data exacerbating the recessionary growth outlook.

In fact, it is commendable that, in this worsening investment environment, month-to-month losses for the Eurekahedge Hedge Fund Index have been the least negative in the last five, while net redemptions are also slightly down from previous monthly highs.

Fund of funds losses were, as a result, far more subdued than in recent months, with the Eurekahedge Fund of Funds index losing 1.6% on average, based on 49.8% of the funds reporting their November 2008 returns as at 18 December 2008.

Allocations to CTA, and to a lesser extent directional macro, strategies continued to return positive into November, gaining +2.5% and +0.5% respectively, benefiting from trend-following in the currency and commodity markets. Flight to quality and the consequent historical lows in yields boosted demand for low-yielding currencies such as the yen and the dollar, while crude oil prices fell for the third straight month amid declining global demand.

Funds allocating to fixed income managers had their least negative month since July 2008 as also the least negative month across strategies, returning -0.5% for November. Illiquidity and selling pressure continued to hurt convertible arbitrage strategies, however, detracting from fixed income returns during the month.

Allocations to special situations strategies such as distressed debt and event driven, posted the largest monthly declines among strategy allocations (-4.8% and -4.2% respectively). Among event driven funds, merger arbitrage plays suffered as, on the whole, spreads continued to widen in the absence of fundamental deal-specific news. Opportunistic equity bets moved in step with underlying equity performance.

Relative value and arbitrage funds had yet another, albeit less, rough month in November, declining 1.6% and 0.4% respectively, as risk aversion, forced liquidations, and deleveraging in the equity and credit markets, continued to hold sway.

Rajeev Baddepudi is hedge fund analyst with Eurekahedge in Singapore.

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