Hedge Funds Extend 2011 Losses
Monday, December 19, 2011

Hedge funds reported losses of 1% in November, with the sector now having posted negative returns in six of the last seven months - the longest downtrend since the latter half of 2008 - as the eurozone crisis continues to cast a dark cloud over the markets, according to BarclayHedge, which tracks more than 6,100 hedge funds, funds of hedge funds, and managed futures programs.

Fourteen of Barclay’s 18 hedge fund indices lost ground in November. The Barclay Emerging Markets Index fell 3.21%, Equity Long Bias gave back 2%, Pacific Rim Equities lost 1.96%, and the Convertible Arbitrage Index was down 1.02%. The Emerging Markets Index has lost 11.56% in 2011.

The Equity Short Bias Index was one of the few categories which gained last month, rising my 2.35%. Healthcare & Biotechnology was up 0.81%, and the Merger Arbitrage Index rose 0.49%.

“The S&P 500 gained 0.10% during the month, concealing stomach-churning intra-month volatility,” says Sol Waksman, founder and president of BarclayHedge. “Fears that a European banking system meltdown and a slowing Chinese economy would push the US back into recession drove US stocks down nearly eight percent during the month, before coordinated government action rallied the markets in the final three days of November.”

“The US Dollar gained ground against all major currencies except the Yen, boosted by a flight-to-quality rally,” added Waksman. “Although a good deal of press has been given to speculation on the imminent demise of the Euro, our recent survey found that 80% of hedge fund managers believed there was less than a 50% chance that the euro would disintegrate over the next 18 months.”

Hedge funds as measured by the Greenwich Global Hedge Fund Index posted a similar level of losses in November as the index declined by 1.05%, an outcome that Clint Binkley, Senior Vice President at Greenwich Alternative Investments, blames mainly on the ongoing eurozone debt crisis.

“European headlines continue to dictate the mood of global markets and cause increased volatility in equities," he noted. "Hedge fund managers have decreased leverage and exposure to mitigate market risk but are still exposed to broader moves."

Earlier this month, Hedge Fund Research reported that hedge fund launches fell and liquidations rose in the third quarter of this year as macro considerations surrounding the European sovereign debt crisis continued to drive financial markets.

According to the HFR Market Microstructure Industry Report, new hedge fund launches declined to 265 funds in Q3, a decline of 15 over the prior quarter but representing a modest increase over Q3 2010. Hedge fund liquidations rose to 213 funds, an increase of 22 over the prior quarter and 45 over Q3 2010.

The Q3 2011 liquidation total represents the highest quarterly total since the first quarter of 2010, when 240 funds liquidated, while hedge fund launches remain on pace for their highest calendar year total since nearly 1,200 funds launched in 2007.

“Trends in launches and liquidations in 3Q11 clearly reflect both increased investor risk aversion and strategic preferences for 2012, with an emphasis on Macro and Relative Value Arbitrage strategies which offer exposure to the macroeconomic and convergence trends continuing to dominate financial markets,” said Kenneth J. Heinz, President of HFR.

“Elevated levels of equity market volatility since mid-2010 have been a consistent theme and area of concern for global investors. Investors are allocating to hedge funds which provide not only the tactical portfolio complement, but institutional risk management systems, infrastructure and transparency, which will continue to appeal to investors into the coming year," he added.