Early estimates indicate the Credit Suisse/Tremont Hedge Fund Index will finish up 2.29 per cent in November, based on 71 per cent of assets reporting.
Hedge funds regained momentum in November following October’s muted returns. A number of global macro (+3.93 per cent) quant funds had their best month of the year which helped make up some of their losses in the second and third quarters.
Gains came mainly from long positions in equities and gold as well as from bullish views on US and UK bonds.
The USD carry trade remained popular among global macro managers as the Reserve Bank of Australia raised its rates for the second month by 25 bps to 3.75 per cent, while the US Federal Reserve is expected to keep rates near zero for some time.
Trend followers in the managed futures (+4.59 per cent) sector were able to regain traction in November after a difficult October, while high frequency traders had mixed results, particularly in FX where volatility in a number of currencies created some sharp reversals. The trend followers generally profited from being long equities, commodities and short term bonds.
Event driven (+1.90 per cent) was among the best performing strategies for the month, with performance contributors coming from profits being taken on distressed structured credit bonds that were bought on valuation plus cash flow bases earlier in the year, and long corporate exposures with a focus on idiosyncratic events. Many managers have been seeking to reduce risk by putting on more hedges, particularly on credit positions that have shown high correlations to equities.
Fixed income arbitrage funds (+1.74 per cent) had a fairly neutral month as many managers also continued reducing risk, and there were no major performance outliers on the positive or negative side. Several managers profited on the front end of the curve which came down (as did the back end), fueled by investors’ continued appetite for treasuries. Because of buyer demand the USD44bn auction of two year notes on 23 November resulted in a 15 per cent drop in the US government’s interest expense, the biggest decrease since 1989.
In corporates, credit default swap prices fell, showing continued improvement in investor perceptions of their credit quality with the exception of sovereign bonds where CDS spreads widened. This was particularly the case in the Middle East and certain European countries whose financial concerns had exposure to Dubai World’s debt following the latter’s 25 November request for a “standstill” on its debt.
