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Hedge funds gain in February as equities approach record level

Hedge funds posted gains in February as broad US equity indexes approached record levels and the US dollar surged against most major currencies, weathering renewed investor concerns on the European banking and sovereign debt crisis following the results of the Italian elections.

The HFRI Fund Weighted Composite Index posted a gain of 0.14 per cent for the month, the eighth gain in the last nine months, led by relative value arbitrage and equity hedge strategies, according to data released by HFR.

Funds of hedge funds performed in line with the overall industry, as the HFRI Fund of Funds Index gained 0.13 per cent in February.

Fixed income-based relative value arbitrage (RVA) strategies led February gains as yields declined and credit spreads remained tight, with the HFRI Relative Value Arbitrage Index posting a gain of 0.7 per cent. Strong and consistent gains in RVA have continued to attract investor capital through year-end 2012, as RVA surpassed equity hedge as the largest area of hedge fund capital. The gain for RVA is the ninth consecutive monthly increase and extends an impressive period since the start of the financial crisis through which RVA has posted positive performance in 43 of the past 50 months. Credit multi-strategies led RVA sub-strategy performance, with the HFRI Relative Value: Multi-Strategy Index posting a gain of 1.5 per cent.

Building on a strong January gain of 3.3 per cent, equity hedge funds also contributed to industry gains in February, with the HFRI Equity Hedge Index gaining 0.5 per cent as US equities approached record levels. Event driven strategies also posted gains as the active corporate M&A environment accelerated with contributions from transactions in Heinz, Liberty Global/Virgin Media, Comcast/NBC Universal, and more. The HFRI Event Driven Index gained 0.1 per cent for the month, marking its ninth consecutive monthly gain, with contributions from special situations and credit and arbitrage positioning.

Macro strategies detracted from industry performance, with the HFRI Macro Index posting a decline of 0.7 per cent. Quantitative, trend-following CTA strategies led sub-strategy declines, with the HFRI Macro: Systematic Diversified CTA Index posting a decline of 1.1 per cent, with negative contributions from long commodity and short equity positions. Currency-focused, discretionary macro and emerging markets had positive contributions to macro performance; the HFRI Emerging Markets Index posted a gain of 0.2 per cent.

“A resurgence of investor risk appetite and optimism drove hedge fund performance gains across credit, equity and arbitrage strategies, and enabled over USD100bn in financing to be raised for M&A transactions,” says Kenneth J Heinz, president of HFR. “With equity markets near all-time highs, investors are actively allocating to the hedge fund industry for a number of reasons, including expectations for an end to quantitative easing, historically tight credit markets, opportunities in macro currency strategies and the potential for destabilising developments in Syria and Iran. Hedge fund investors are positioning to participate in continued equity market gains but also to insulate their portfolios from equity or credit market weakness, rising yields or macro-political uncertainty.”

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