01.13.2014
By Terry Flanagan

Hedge Funds Post Solid Gains

Hedge funds posted a fourth consecutive month of gains in December led by equity hedge and event driven strategies, as broad based performance gains across all strategies contributed to the strongest annual performance since 2010.

The HFRI Fund Weighted Composite Index gained +1.2 percent for the month, bringing full year 2013 performance to +9.4 percent, as reported by HFR, a provider of indexing, analysis and research of the global hedge fund industry.

The HFRI Fund of Hedge Funds Index gained +1.3 percent for December and +8.9 percent for 2013, the best annual performance since 2009.

Performance gains for December and for 2013 were led by resurgent equity hedge strategies, with the HFRI Equity Hedge Index gaining +1.64 percent for the month and +14.61 percent for the year, also the best annual performance since 2009. Mirroring trends in the broader equity market and benefiting from the strong IPO environment, the strongest area of EH substrategy performance was from funds focused on technology and healthcare.

Event driven funds also posted gains in December, as strategic M&A and shareholder activism continued to drive performance. The HFRI Event Driven Index was up +1.1 percent for December and +12.3 percent for 2013, also the best annual performance since 2009. ED funds specializing in Special Situation and Activist strategies led ED returns in both December and for 2013, with these climbing +1.5 for the month and +15.1 and +14.8 percent, respectively, for the full year.

“Hedge funds posted the strongest year since 2010 as long-biased beta equity exposure, high yield credit tightening and the dynamic environment for shareholder activism and corporate transactions offset the negative impact of short equity portfolio hedges, rising yields and macro complexity associated with stimulus measures by the US Federal Reserve,” said Kenneth Heinz, president of HFR.

While both equity and credit-oriented strategies had the best performance since 2009, the reduction of quantitative easing into the end of 2013 constitutes a crucial inflection point for hedge fund strategy performance, allowing for a beginning of the normalization of market interest rates integral to the performance of fundamental macro and equity hedge fund strategies.

“As this process evolves into 2014, the attribution of hedge fund performance between long and short portfolios is likely to shift to a more balanced distribution, enabling profitable mean reversion across equity and fixed income positions and contributing to a more tractable environment for macro strategies, extending industry wide performance gains into 2014,” said Heinz.

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