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Hedge funds conclude challenging 2011; position for 2012

Monday, January 09, 2012

Kenneth J. Heinz
Opalesque Industry Update: Hedge funds concluded a challenging 2011 with a decline in December, as the HFRI Fund Weighted Composite Index declined by -0.18 percent, bringing full year 2011 performance to -4.8 percent, according to data released today by HFR (Hedge Fund Research, Inc.), the leading provider of data, indices and analysis of the global hedge fund industry. The decline for 2011 marks only the third calendar year decline since HFR’s index performance inception in 1990, but is the second decline in the last four years. Hedge funds produced a gain of +1.3 percent in 4Q11, following a sharp decline of -6.7 percent in the volatile 3Q; hedge funds gained +0.77 percent in 1H11.

Two of the four strategy areas ended 2011 with gains in December, including Macro (+0.16 percent) and Relative Value Arbitrage (+0.50 percent) strategies; Fixed Income-based Relative Value was the only strategy area of positive performance for full-year 2011, gaining +0.55 percent, while Macro declined by -3.6 percent. Event Driven posted a narrow decline of -0.01 percent in December and -2.65 percent for 2011.

Equity Hedge strategies were the weakest area of performance for both December and 2011, posting a decline of -0.66 percent in December, and concluding 2011 with a decline of -8.0 percent. Performance of Equity Hedge was undermined by weakness in Energy/Basic Materials, Emerging Markets and Fundamental Growth, which posted full-year declines of -16.75, -12.9 and -12.6 percent, respectively. Partially offsetting these declines, certain Equity Hedge sub-strategies posted 2011 gains, including Technology/Healthcare (+1.14 percent) and Short Bias (+1.0).

“Volatile and unpredictable market dynamics throughout the year created a challenging environment for hedge funds in 2011, with aggregate losses across currency, commodity, Emerging Markets and equity strategies related to the European currency and sovereign debt crisis,” stated Kenneth J. Heinz, President of HFR. “Risk-off trades dominated 2011, creating challenges for convergence oriented funds, while contributing to gains across fixed income and certain low net exposure hedged strategies. After a challenging 3Q, hedge funds adapted strategies to this continuing macro-volatility dynamic in 4Q in anticipation of this environment persisting into early 2012.”

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