Hedge funds edged up to end the year, and trounced the broader markets. But neither fact helped the industry avoid its first-ever down year.
The Greenwich Global Hedge Fund Index finished 2008 down 15.7% after returning 1% in December. Just one of Greenwich Alternative Investments’ main strategy indices and three of its subindices were in the black on the year, but the firm was quick to note that stock markets around the world fared much worse; the Standard & Poor’s 500 Index lost 37% last year.
“Although hedge funds didn’t escape the financial crisis in 2008 and posted negative annual returns for the first time, hedge funds have outperformed equities on a 1, 3, 5-year and even 10-year basis,” Margaret Gilbert, managing director at Greenwich AI, said. “December provided some comfort as most hedge fund strategies rebounded to end the year on a positive note. Although we expect to see further redemptions and market pressure in some areas, hedge funds by and large seem to be returning to business as usual.”
Hedge fund managers can only hope so: Long/short equity funds fell 21.9% last year, with market neutral funds losing 12.3% and special strategies 25.9%. Among Greenwich AI’s major strategy indices, only directional trading posted a positive year, rising 9.6% on the back of 20.2% average return for futures funds.
Last year was the hardest on convertible arbitrage funds, the only substrategy to actually underperform the S&P500 with a 38% drop. The big losers of 2008 also include emerging markets funds (down 36.5%), growth equity funds (down 28.7%) and distressed securities funds (down 20.8%). Other than futures funds, the few winners were short-sellers (up 30.2%) and statistical arbitrage funds (essentially flat at 0.1%).