Hedge funds posted their strongest monthly performance since February to conclude Q3 2012, led by equity hedge strategies as investor sentiment improved on positive developments in the European banking and sovereign debt crisis, as well as US stimulus efforts, according to data released by HFR.
The broad-based HFRI Fund Weighted Composite Index gained 1.1 per cent in September, the fourth consecutive monthly gain, ending 3Q up 2.9 per cent and improving YTD performance to +4.7 per cent. Fund of hedge funds also posted the best performance since February, with the HFRI Fund of Funds Composite Index gaining 0.8 per cent.
September gains were led by equity-sensitive strategies as the HFRI Equity Hedge Index gained 1.94 per cent, the fourth consecutive month of positive returns, with significant contribution to performance from both fundamental growth and value strategies, as well as funds focused on technology and healthcare. Emerging markets hedge funds produced the strongest industry performance, with the HFRI Emerging Markets Index posting a gain of 3.1 per cent for the month.
Relative value arbitrage and event driven strategies also posted gains on continuation of strong M&A, credit and equity environments, with the HFRI Relative Value and Event Driven Indices gaining 1.3 and 1.1 per cent, respectively. Despite the increase in yields, fixed income based relative value arbitrage gains were driven by credit spread tightening, effective interest rate hedging and targeted purchases of fixed income securities; ED gains were broad-based across sub-strategies including distressed, activist and special situations. The HFRI Relative Value Index posted its ninth gain in the last ten months, with contributions from credit sensitive exposures; the HFRI FI: Asset Backed Index advanced 2.0 per cent in September and leads all hedge fund strategies with a gain of 13.3 per cent for the year.
Macro hedge funds detracted from industry wide gains on weakness in trend following and commodity exposures, with the HFRI Macro Index posting a decline of 0.26 per cent; the September decline was the second consecutive monthly decline for macro. Systematic macro funds posted declines on short exposures to equities and commodity metals, as the HFRI Macro: Systematic/CTA Index posted a decline of 0.9 per cent. Discretionary macro and currency focused strategies had positive contributions from positions concentrated in Dollar/Euro, global equities and short fixed income.
“Despite continued uncertainty, the global macro environment improved significantly in 3Q12 as reflected by rising equity markets, increasing investor risk tolerance, supportive financial market liquidity and enhanced hedge fund performance,” says Kenneth J. Heinz, president of HFR. “As a result, institutional investors which had historically maintained small or no allocation to hedge funds are currently exploring or proceeding with commitments to alternative assets as a prudent mechanism to reduce equity market volatility, enhance fixed income portfolio yields and increase the likelihood of achieving required return targets.”