Short-Biased Hedge Funds Rise in February

Pessimists were once again winners in the hedge fund sector last month, according to data released Friday, with short funds gaining more than 3% as the industry contracted and the broad markets posted double-digit declines.

Hedge Fund Research, which tracks industry data, said its composite hedge-fund index dropped 0.5% in February, though short-biased funds rose 3.2%. So far this year, hedge funds that bet against equities have added 6.1%.

The trend is unsurprising as major benchmarks have hit lows not seen in over a decade. The Dow Jones Industrial Average declined over 11% in February, and slumped further this month, falling below 6500 at one point Friday.

The leading fund strategy was fixed-income convertible arbitrage, in which fund managers profit from huge differentials between a company's various bonds. Those hedge funds gained 3.3% in February, as a massive plan was unveiled to restructure the debt of Citigroup (C Quote) and AIG (AIG Quote).

Credit-market dislocations also offered big returns for the debt and preferred shares of other major firms whose financial health has come into question, like Bank of America (BAC Quote), GM (GM Quote) and GE (GE Quote).

In a volatile month in which the DJIA's high and low point had a differential of more than 1,300 points in just 19 trading sessions, the worst hedge-fund performance came from funds that bet on the direction of stocks based on quantitative analysis. Such quantitative funds fell 1.9% in February.