Flexible hedge fund strategies perform best

HEDGE FUNDS managed to post positive returns last month by capitalising on favourable fixed income and foreign exchange positions, a top hedge fund index revealed yesterday.

The Credit Suisse/Tremont Hedge Fund index, which is calculated as a total return index on a monthly basis and tracks the asset-weighted average performance of more than 5,000 hedge funds, gained 0.68 per cent in February and is now up 0.85 per cent year-to-date.

Hedge funds had suffered badly during the financial crisis – the index was down 19.07 per cent in 2008 – but rebounded strongly in 2009 as market liquidity improved. So far this year, they seem to have built upon the improvements made over the past 12 months.

The Credit Suisse/Tremont Index breaks the funds’ performance down into different strategies, which gives investors a good idea of which methods of trading are proving the most and least successful at the moment.

In February, the best performing sub-sectors were managed futures (1.81 per cent), long/short equity (1.32 per cent) and global macro (1.10 per cent).

Managed futures funds invest in listed bonds, equities, commodity futures and currency markets. These funds tend to be trend followers, which means that they benefited particularly well from short positions in weak currencies such as the pound and the euro as well as short interest rate futures exposures.

However, they underperformed in 2009 because there were fewer clear trends in the markets to capitalise on. But in 2008, when there was plenty of downward momentum, hedge funds employing managed futures strategies performed exceptionally well (+21.53 per cent).

Global macro is one of the biggest weights in the overall index at 16.9 per cent and hedge funds in this category have a broad investment mandate and take a top-down global approach to anticipating price movements.

These hedge funds also played the currency exposure theme and benefited from the rally in precious metals and industrial metals in the second half of last month. Because they have a broad strategy, global macro funds are better placed at the moment to switch in and out of positions in response to market movements.

Long/short equity hedge funds reversed much of their poor January performance last month, as they tracked the rally in the equity markets. Long/short equity strategies tend to be long-biased and will do well when equity markets rally. A good earnings season translates into better performance for this class of hedge fund strategy.

With markets still bullish but nervous, the strategies that are performing best are those that are long-biased and follow trends, but are also flexible and give exposure to a broad set of assets. Those that sit on the fence, such as equity market neutral funds (down 1.26 per cent year-to-date) are struggling.