| Hedge funds post biggest gains since 2003, buoyed by distressed debt and emerging markets |
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| 21/01/2007 | |
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Hedge funds have posted their biggest annual gains since 2003, buoyed in part by a particularly strong showing in distressed debt and emerging markets. Hedge funds posted an average gain of 13% in 2006 compared to returns of just more than 9% in 2004 and 2005 respectively, according to data from Hedge Fund Review (HFR). The biggest losers were short-sellers. They shed 1.98% for the year as the U.S. equity markets rallied steadily. As a strategy, short-selling has just a few billion dollars under management compared to the global hedge fund industry estimated at $1.5 trillion. As a result, the impact it has had on the averages has been limited. All Dow Jones hedge-fund strategy indexes grew in 2006, with distressed debt managers gaining 15.3%. Long/short equity hedge funds returned 13-14%, and during a year characterised by a wave of mergers and acquisitions, convertible arbitrage funds, which suffered in 2005, returned 12.7% on average. Meanwhile, global-macro hedge funds, which bet on broad economic trends using a wide variety of securities, posted lacklustre returns of 4.76%, as some managers lost money shorting 10-year Treasury bonds during most of 2006, reports the Hennessee Group. Unstressed over distressed Funds that invested in the emerging markets generated 25%, the highest returns of the year, according to Greenwich Alternative Investments. In the aggregate, however, hedge funds lagged the broader indexes such as the S&P, which soared 15%. The last time hedge funds outperformed that index was in 2002 when they lost 1.45% compared to a 22% drop for the S&P, says HFR. Distressed-debt hedge funds played catch up on the S&P in 2006, gaining 13.4%, according to Edhec Alternative Indexes. Looking at 2007, a number of market participants expect distressed-debt hedge funds to continue to perform strongly as defaults remain below 3%. Sectors where hedge funds can expect to see mergers and acquisitions activity in 2007 include airlines, home building and healthcare, says Marti Murray, head of hedge fund Murray Capital Management. Yet a slower economy could make distressed debt, which was used widely in buy out deals in 2006, tougher to manage. The search for incremental yield has caused high yield spreads to tighten 49 basis points in 2006 at 320bp, leaving distressed-debt hedge funds with little room for error. Geographically, most hedge funds are likely to stay away from Thailand following the government's move late last year to tax short-term foreign investments in a bid to control the rise of the Thai bond. Yet even that draconian measure failed to dampen the advance of single-strategy emerging market hedge funds in 2006. The HFR Index for Eastern Europe soared 30.3% for the year through November, while the HFRI Asia advanced 22.3% VB |
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