October saw hedge funds post their strongest monthly gains in 2011, according to Chicago-based Hedge Fund Research, which says its HFRI Fund Weighted Composite Index was up 2.43% for the month.
The good news couldn’t come at a better time—hedge funds had suffered two straight months of decline and posted a Q3 loss of 6.5% (the fourth worst calendar quarter performance of all time, according to HFR).
Equity hedge strategies made the largest positive contribution to index performance, gaining 5.2% in October. This was the best single-month gain for equity hedge since May 2009 and ended a volatile, 5-month decline for the strategy.
Breaking down the equity hedge category into its sub-strategies, HFR reports that energy/basic materials rose 8.%; technology/healthcare strategies added 3.9%; and emerging markets gained 5.0%, partially reversing losses from the previous two months.
Event driven funds, riding improved equity markets and tightening credit and M&A spreads, gained 2.7% in October, their best monthly gain in 2011, with positive contributions from special situations and activist funds. Relative value arbitrage funds added 1.33%, with gains in corporate fixed income. The HFRI Relative Value Index has gained 0.94% through October 2011.
Macro funds, facing trend reversals and despite positive contributions from commodity exposures and discretionary managers, declined 1.4% in October while the HFRI Macro: Systematic Diversified Index fell 3.5%, wiping out YTD gains with the worst month since July 2008.
“Hedge funds posted gains for October concentrated in equity hedge and event driven strategies, as managers adjusted exposures intra-month in response to rapidly improving conditions across equity and credit markets,” said Kenneth J. Heinz, president of HFR. “The primary focus for managers, as well as the primary catalyst for financial markets, continues to be the European sovereign debt crisis, with the outlook having improved despite the continued likelihood of volatility and unpredictable political developments. In the current environment, fund managers are looking to maintain tactical flexibility to opportunistically adjust exposure to dynamic market conditions, while maintaining core exposures to constructive portfolio themes across equity, credit, commodity and currency markets.”