Hedge Funds Pass High-Water Mark

Hedge funds have finally recovered from losses they suffered during the financial crisis, according to the Barclay Hedge Fund Index.

The average hedge fund’s 3.63% gain in September at long last returns the average industry player to its high-water mark, BarclayHedge’s Sol Waksman said.

“September’s gain puts the index into new high ground. The prior peak was established at the end of October 2007 when the index gained 2.87%.”

“It’s taken three years for hedge funds to recover from the financial meltdown and break their previous high,” he said.

The BarclayHedge index is now up 5.26% on the year, buoyed by positive returns in 17 of its 18 strategy indices and “propelled by a robust rally in global equities, a boom in mergers and declining credit spreads,” Waksman explained. Some 90% of the hedge funds reporting to the BarclayHedge index were up in September.

Healthcare and biotechnology funds led the way last month, adding 6.35%. Equity long-bias funds also did well, rising 5.86%. Emerging markets funds were up 4.98% and global macro funds 3.65%.

With the Standard & Poor’s 500 Index an Dow Jones Industrial Average posting their best Septembers since the Great Depression, it was a long month for short sellers, who lost an average of 6.45% on the month.

The Barclay Fund of Funds Index returned 2.11% last month. It is up 1.25% on the year.

It’s pretty much all about beta. Markets are up, credit spreads are tightening, and hedge funds are playing the Bernanke put. One risk officer at a fund of funds told me that most managers are having a hard time with their short books. “Any pickup in M&A activity can kill them, so they’re reducing net exposure”.

Going into yearend, we”ll see is Foreclosure-Gate hurts hedge funds, the majority of whom remain long financial shares. But activity in the hedge fund industry is definitely picking up. Bloomberg reports that UBS, the largest Swiss bank, said it has been in talks with “dozens” of proprietary traders from firms worldwide who may start their own hedge funds as banks seek to comply with new U.S. rules aimed at curbing risk.

And in Asia, Chris Howells of ChannelNewsAsia.com reports that hedge funds are making a slow comeback in the region since many had suffered losses amid the financial crisis two years ago. We’ll see how this all plays out, but hedge funds will play an important role in reflating risk assets.

Finally, I recommend you download and go through this presentation by Eric Chaney, Chief Economist at AXA Group. Eric’s five key assessments:

1. Uncertainties may linger until China re-accelerates
2. This should happen in the next three months
3. €-area governments and ECB have ring-fenced debts
4. Yet, €-debt crisis aftershocks are possible
5. Fears of generalised deflation are overblown

Short term conclusions: Risk aversion may remain high

There is a lot of food for thought in this presentation, and many hedge funds and asset managers are positioning their portfolios accordingly.