Hedge Funds Turn In Best Performance In A Decade
Tuesday, January 26, 2010

2009 marked the best annual hedge fund performance in a decade, according to a new research piece released by the Credit Suisse Tremont Index.

The report, "Hedge Funds Hit a High Note: 2009 Industry Review," that examines hedge fund performance in 2009 with a focus on the key factors that contributed to the turnaround seen in the industry last year. It shows that 2009 saw the greatest performance rebound since inception of the Index in 1994.

The report notes that Event Driven, Long/Short Equity and Emerging Markets drew renewed interest from investors, particularly in the second half of 2009.

"Many investors appear to believe the Event Driven sector, the largest sector and one which has consistently ranked as one of the top performing index strategies over time, is poised to capitalize on opportunities created by the market dislocation," the report states.

Credit Suisse/Tremont says that there is an increase in risk appetite and strong equity rallies in developing nations drove investor interest in emerging markets last year. There also appears optimism about global growth, rising commodities prices and positive macro economic data. The report observes that China remains "a particular area of interest" due to its strong growth prospects.

However, the report says that the "most significant comeback story" was witnessed in the Convertible Arbitrage sector. "In the wake of a ‘perfect storm’ of adverse market conditions during the fourth quarter of 2008 the strategy fell significantly as increased selling pressure and tightened liquidity led to pricing imbalances in the sector," the report states. "Yet these same factors worked in many managers’ favor going into 2009 and most were able to successfully capitalize on pricing imbalances while low valuations and attractive credit spreads attracted new entrants to the market and eased liquidity constraints."

Convertible Arbitrage scored the strongest performance of all sectors in 2009, finishing up 47.3% for the year to the end of December.

Overall, the Credit Suisse Tremont Index was up nearly 19% last year, with 83% of all funds posting positive performance as of December 31, 2009.

The report shows that overall, more than three-quarters (77%) of hedge funds have recouped their 2008 losses suffered since peak performance levels or “high water marks" were hit.

An estimated 58% of all “impaired” assets have returned to standard liquidity status, the report notes, representing a total of USD102bn. An additional USD72bn in impaired assets currently remain illiquid.

The hedge fund industry experienced net inflows of USD12bn in the fourth quarter; however, overall the industry lost USD74bn as a result of investor redemptions in 2009.

Including performance gains, current industry assets under management are estimated at USD1.5 trillion as of December 31, 2009.

The percentage of closed funds in the industry has dropped from 17% to 13% since November 2007, signifying increased investor access to some of the industry’s most in-demand managers, the report says.

“Hedge funds added an additional 0.88% to overall performance in December, solidifying the best annual returns for the Credit Suisse/Tremont Hedge Fund Index in ten years," Oliver Schupp, President of Credit Suisse Index Co., Inc., confirmed earlier in the month.

The Event Driven sector was the highest performer for the month, returning 2.28%, while Convertible Arbitrage and Emerging Markets were the strongest overall performers for the year, returning 47.35% and 30.03% respectively, Schupp said.

However, Dedicated Short and Managed Futures funds continued to struggle in December 2008, although the sectors were the only two to finish 2008 in positive territory Schupp added.