Funds of funds continued their healthy performance in October, and the Eurekahedge Fund of Funds index rose an impressive 3% during the month.

These returns came on the back of strong performance of underlying hedge funds, which did well against the back drop of soaring equity-prices, surging commodity-prices, and further declines in the US dollar.

All fund of funds strategies recorded returns in excess of 1% this October. CTA and long/short equity focused funds of funds were on top of the charts, with returns averaging 3.5% and 3.3% respectively. The former largely benefited from CTA managers that exploited the surge in gold and oil prices and went short on the US dollar, while the latter made healthy gains as long/short equity funds fared well.

Arbitrage and relative value funds of funds ended the month up 1.9% and 3.1%. Arbitrageurs also saw gains from merger arbitrage opportunities, during the month, as the LBO and M&A markets gained momentum. Multi-strategy managers benefited from their investments into long/short and CTA hedge funds, among others, and returned 3% last month.

Emerging market fund of funds were the best performers, posting returns of 4.5%. A large portion of the gains can be attributed to investments into regional long/short equity funds. North American funds of funds returned 2.7%.

Asia Pacific-focused funds of funds were up 2.5%, while the returns of European managers averaged 2.2% for the month.

After yet another healthy month for hedge funds, and therefore funds of funds too, our outlook for the hedge fund industry continues to remain positive.

This is on account of several factors - such as the further-declining dollar, which could translate into lucrative opportunities for foreign investors eyeing assets in the US (whether from the point of view of acquisitions, or otherwise), and the gradual return of normality in markets, as investors are gradually turning towards riskier assets once again, and managers are slowly seeing rising levels of liquidity, which had disappeared during the last few months.

The Fed slashed interest rates by another 25 bps on the last day of October, which, after September’s rate-cut, has definitely provided market players with sufficient impetus for growth, liquidity, and risk-taking.

However, it remains to be seen how the Fed will tackle the next problem being faced by the economy - rising inflation - and it will certainly be interesting to see how the Fed’s actions to tackle it affect hedge funds, and the global macroeconomic picture at large.

For the latest October 2007 returns and 2007 YTD returns for the Eurekahedge hedge fund and fund of funds indices, visit www.eurekahedge.com/indices or contact editor@eurekahedge.com to comment on this report. Rajeev Baddepudi is hedge fund analyst with Eurekahedge in Singapore