Hedge funds finished 2010 on a high according to the latest figures published by Edhec with all bar one (Short Selling, down 5.46%) of the strategies in the EDHEC-Risk Alternative Indexes recording positive figures.
Year to date figures were also all positive with the exception again of Short Selling, which lost 16.9 per cent during 2010. The top performer was Distressed Securities up 13.8 per cent followed by Event Driven (+12 per cent) and Emerging Markets (+11.7 per cent).
In December, a wave of optimism dominated the stock market. The resolute rise of the S&P 500 index (+6.68%) followed a remarkable drop in implicit volatility (17.8%) of nearly a quarter. Over the year, the S&P 500 index grew by 15.06% to return to its level of June 2008, before the mid-2008 crash.
On the fixed-income market, after significant losses in November, a morose situation continued to prevail. Gloom persisted for regular bonds (-1.43%) and the Lehman Global Bond index (-1.80%), which both registered their worst performance for 2010. On the other hand, riskier investments in convertible bonds (+4.33%) benefited from a remarkable rebound. With its best score since May 2008, the commodities market (+9.72%) managed a fourth consecutive month of profitability and, not unlike the stock market, returned to the level it reached before the 2008 crash. The dollar ended the month with a loss (-2.09%).
The rebound in convertible bonds and the renewed increase in the credit spread (+0.35%) pushed the Convertible Arbitrage strategy (+1.42%), back to profitability after the previous month’s short incursion into negative territory. Over the year, Convertible Arbitrage (+12.23%) remained the best-performing hedge fund strategy (after Distressed Securities).
Taking advantage of the persistent growth in the stock market, all equity-oriented strategies scored a fourth consecutive month of profits. The Long/Short Equity (+3.56%) and Event Driven (+2.97%) strategies ended the year with rarely attained monthly performances. The Equity Market Neutral strategy managed a naturally moderate yet sustained gain (+1.05%).
Overall, the Funds of Funds strategy did well (+1.99%) in December, but remained behind most other strategies. In 2010, although none of the hedge fund strategies outperformed the S&P 500 index over the year, all of them (except Funds of Funds) did outperform over the past three years, which included the 2008 crisis.