Arbitrage Is King In ’06, According To HFR Indices

Jan 9 2007 | 12:39pm ET

The average hedge fund fell shy of double-digit returns in 2006, according to year-end numbers from Hedge Fund Research’s HFRX indices, but several individual strategies, especially arbitrage funds, managed to return better than 10%.

Still, it wasn’t enough to top to broader markets: None of the dozen HFRX indices or subindices came close to the Standard & Poor’s 500’s 13.62% return.

The HFRX Global Hedge Fund Index rose 1.58% in December to hit 9.26% on the year, while the Equal Weighted Strategies Index closed 2006 with an 8.83% return after rising 1.47% last month. The Absolute Return Index lagged both, returning 1.26% in December and 7.43% on the year.

The best performers were the HFRX Market Directional Index and its subindices. Market directional funds returned, on average, 10.45% in 2006 (1.05% in December). The subindices in the double-digit club were merger arbitrage (10.73% in 2006, 0.85% in December), relative value arbitrage (10.65% in 2006, 1.69% in December) and event-driven (10.32% in 2006, 0.85% in December).

Of the remainder, the top performers included convertible arbitrage (9.57% in 2006, 1.34% in December), distressed securities (9.56% in 2006, 2.1% in December) and equity hedge (9.23% in 2006, 1.5% in December). Equity market-neutral funds had a brutal year, according to HFR, returning only 4.76% on the year (0.91% in December), and, in spite of a strong December during which it returned 2.58%, the HFRX Macro Index could only manage a 5.61% return in 2006.


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Editor's Note