Hedge funds, already on a roll from the end of last year, began catching a bit of the broader market's rally in January, with emerging-market funds showing the best returns, according to the
Credit Suisse First Boston/Tremont Hedge Fund Index
The average hedge fund was up 1.7% last month, not far behind the 1.84% gain posted on the
stock index. Several hedge fund strategies started the year off particularly well: in emerging markets, the average fund CSFB/Tass Tremont was up 2.53%. Event-driven strategies, which bet on takeovers and turnarounds, also posted robust numbers in general, with average gains of 2.16%. Within the general field, distressed securities funds were up 2.42%, and multi-strategy event-driven funds were up 2.01%, according to the index.
More significantly, long-short equity hedge funds, which remain the most commonly employed strategy of these lightly regulated private investment partnerships, were up a 2% last month, ahead of the broader market.
This suggests that many hedge funds have moved toward a long bias and are letting a rising market boost their performance. Long-short funds lagged the broad market index last year and returned an average of 17.27% in 2003, well behind the S&P 500's 26.86%. Monthly comparisons show the average long-short fund beat the S&P on a monthly basis only five times last year, including January and February, where both indices showed average losses.
Many long-short funds may have erred on the side of caution, opting for a short bias as the market rallied and held back before building up substantial long positions. The problem was described in a letter sent last month to investors in Andor Capital Management's flagship technology hedge fund.
"Companies were still losing money and valuations looked ridiculous. So we waited for earnings reports," the letter said. "Besides, we couldn't find any stocks that looked like longs in our models." The fund lost nearly 16% last year.
Dedicated short-bias funds were the only group of the 10 strategies tracked on the Tass/Tremont Index to post an average loss last month, coming in down 1.73%. Short bias funds lost an average of 32.59% in 2003.