Big December Boosts '12 Hedge Fund Returns

Jan 9 2013 | 12:31pm ET

Hedge funds rose almost 7% last year, ending the year with their strongest month since February, according to data from the Hennessee Group.

The Hennessee Hedge Fund Index ended 2012 up 6.99%, thanks in part of a 1.45% jump in December. Hedge funds suffered only one losing month in the last seven of the year, and only three down months over the course of the year. But they still badly lagged broader markets.

“Hedge funds continued to perform well in December, adding to their gains for the year,” Hennessee's Charles Gradante said. “Hedge fund managers benefited from both increased exposure levels and alpha generation from security selection as high correlations continued to decline among stocks with attractive and unattractive valuations.

“2012 was another year where global markets were driven by macro news.  Global stimulus outweighed renewed concerns about the European sovereign debt crisis, a global economic slowdown, and political uncertainty in the U.S.  Fears of a recession declined dramatically and risk assets rallied. Hedge funds posted a respectable year, but underperformed broad equity markets due to conservative positioning early on.  During the first quarter, below-average exposures led to reduced up-market capture.  In May, European worries resurfaced in a dramatic sell off, resulting in a reduction of risk and leading to underperformance in the relief rally that followed.  However, the last six months have been encouraging.  Despite volatile macro events, such as political uncertainty and fiscal cliff in the U.S., managers were able to capture a good portion of upside and generated alpha, which bodes well for our outlook for hedge fund performance in 2013.”

Financial equities funds did best last year, rising 13.95% (2.85% in Dec.). Distressed funds (13.61% in 2012, 3.1% in Dec.), Latin America funds (12.5%, 0.9% in Dec.), healthcare and biotechnology funds (12.34%, 0.83% in Dec.), Europe funds (11.24%, 2.48% in Dec.), international funds (10.95%, 1.95% in Dec.), event-driven funds (10.81%, 1.64% in Dec.), telecommunications and media funds (10.49%, 1.8% in Dec.), and convertible arbitrage funds (10.46%, 0.71% in Dec.) all performed well, as well.

Only two strategies lost ground in 2012: short-biased funds, which more than matched the Standard & Poor's 500 Index's upside on the downside, losing 17.82% (down 3.61% in Dec.), and technology funds, which lost 4.67% (down 1.59% in Dec.). Both strategies were also December's only two losers.

Other prominent strategies posted modest gains: Fixed-income funds rose 8.05% (0.95% in Dec.), merger arbitrage fund 6.26% (1.85% in Dec.), market-neutral funds 5.55% (0.57% in Dec.), emerging markets funds 5.2% (3.49% in Dec.), Asia-Pacific funds 3.11% (2.97% in Dec.) and macro funds 0.92% (1.26% in Dec.).


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