After suffering through the dog days of August, hedge fund managers rebounded to post boffo returns last month. According to Chicago-based industry data group Hedge Fund Research, hedge fund strategies generated returns, net of fees, of 2.98% in September. That amounts to the second-best September return -- the best was 1997 when hedge fund strategies generated 3.72% -- in HFR's weighted composite index since it began tracking returns in 1990, says HFR President Ken Heinz. The big month follows an abysmal August, in which hedge funds, particularly quant-driven and directionally focused investment firms, were whipsawed by losses on esoteric subprime mortgage-related debt and a widespread deterioration in confidence in credit quality. Hedge funds posted negative returns of 1.5% in August, according to the HFR index, which tracks some 2,000 hedge funds. September's numbers suggest that formerly crippled markets may be experiencing a temporary respite, if not a genuine loosening up. Heinz attributes the overall rebound to the lift the composite index is being granted by investment strategies focused on emerging markets and Asia. Emerging markets-focused hedge funds posted an average return for September of 4.91% and Asian-oriented funds saw a return of 5.23%. Year-to-date returns in both funds are about 20% and 30%, respectively. Investments in so-called collateralized debt obligations and other structured securities tied to loans provided to borrowers with shady credit have been at the heart of some of the pain that hedge funds have been facing. Those include a pair run by Bear Stearns ( BSC), which accounted for $200 million in losses at the New York-based investment bank, and Swiss investment bank UBS ( UBS), which shut down its alternative asset-management firm Dillon Read Capital due to subprime losses.
Most recently, well-known hedge fund manager Victor Niederhoffer reportedly has been forced to shutter his flagship Matador fund after suffering subprime whiplash during the summer. Yet despite all the pain, hedge funds are seeing year-to-date returns of 9.14% and could look to end 2007 not far off of the more than 12% returns posted last year. Positive market action has not been a boon for all areas of the hedge markets, though. Short-selling strategies, which make bets that an index or particular security will lose value, were battered in September, posting a negative return of 3.14%.