Hedge Fund Report: Equity Hedge Leads, Macro Funds Wane Despite Commodity Gains

(November 8, 2011) — Hedge funds began the fourth quarter with their best performance month in 2011, with equity hedge funds leading the rankings amid gains in energy, technology, and emerging markets, according to Hedge Fund Research.

The HFRI Fund Weighted Composite Index gained +2.43% for October. The gain ended a two-month decline and followed a third quarter drop of -6.5%, the fourth worst calendar quarter performance in history, according to the research firm. 

“Hedge funds posted gains for October concentrated in Equity Hedge and Event Driven strategies, as managers adjusted exposures intra-month in response to rapidly improving condition across equity and credit markets,” said Kenneth J. Heinz, President of HFR, in a statement. “The primary focus for managers, as well as the primary catalyst for financial markets, continues to be the European sovereign debt crisis, with the outlook having improved despite the continued likelihood of volatility and unpredictable political developments. In the current environment, fund managers are looking to maintain tactical flexibility to opportunistically adjust exposure to dynamic market conditions, while maintaining core exposures to constructive portfolio themes across equity, credit, commodity and currency markets.”

According to HFR, while equity hedge strategies had the largest positive contribution to index performance in the month, event-driven funds also posted gains on improved equity markets. On the other hand, macro funds posted declines on trend reversals, despite positive contributions from commodity exposures and discretionary managers.

Institutional investors have responded to hedge fund gains by pumping up their commitment to the asset class. Last month, the roughly $78.6 billion State of Wisconsin Investment Board (SWIB) increased its investment into hedge funds, investing a total of roughly $300 million into the asset class as of August 31, with an additional $100 million in October. There are no final numbers available for the month of September, the fund’s spokesperson Vicki Hearing told aiCIO in late October. “SWIB’s move into hedge funds has been slow and deliberate beginning in January 2010 with the approval of the asset allocation that included a hedge fund strategy,” Hearing said, noting that the money used to fund the hedge fund portfolio came from rebalancing during market changes into cash, or a liquidity fund.