There appears to be a growing divergence in hedge funds returns between those funds caught in the middle of the credit market's troubles and those benefiting from the environment created by attempts to solve the issues. Commodity focused managers are off to their best start in 10 years and are benefiting greatly from U.S. monetary policy which is more focused on liquidity than limiting inflation. The HFN CTA/Managed Futures Average was +8.95% in February and is +10.96% in 2008. In the last twelve months, the average CTA has returned +24.9%.
The relative decline in value of the USD and growing interest rate differentials between U.S. Treasuries and various sovereign rates has been a factor in macro funds being one of those groups able to take advantage of shifting global market dynamics. The HFN Macro Average was +3.41% in February and is +2.91% YTD. For macro funds, 2008 marks the highest beginning-of-year outperformance over broad hedge fund returns since 1997, a year in which the average macro fund went on the return +24.23%.
Both emerging markets and energy sector funds bounced back after large January losses to support aggregate hedge fund performance in February. The HFN Emerging Markets Average was +3.60% and the HFN Energy Sector Average was +2.65% in February. Neither, however, was able to fully recoup from losses in January and are -1.56% and -3.63%, respectively in 2008.
For the second straight month, long/short equity managers proved able to add protection during market declines. The HFN Long/Short Equity Average was +2.03% in February and despite the average L/S manager returning -2.52% YTD, the strategy has outperformed the S&P by 654 bps. Market neutral funds are doing a better job of remaining independent of overall market swings, but short biased funds are taking full advantage of the environment. The HFN Market Neutral Average was +1.40% in February and is +0.23% YTD while the HFN Short Bias Average was +4.43% in February and +9.24% YTD.
Not every hedge funds strategy was able to dodge bullets in February and there will likely be more poor performance figures reported as the month progresses. Initially it appears arbitrage strategies in fixed income markets were most negatively affected by credit market disruptions. The HFN Fixed Income Arbitrage Average was -0.41% in February while the HFN Convertible Arbitrage and Capital Structure Arbitrage Averages were -2.74% and -4.72%, respectively.
The main point to glean from hedge fund returns during the first two months of 2008 is that the universe of hedge funds is diverse and in almost any market environment there will be a number of funds able to produce outstanding returns. As market dynamics shift, so too will the strategies which benefit and thus far in 2008 it appears those making strong bets on commodity and interest rate differentials and either taking advantage of volatility or properly positioned with short exposure are in the best shape.
