Hedge Fund Returns Trailed Equities In 2006

by Phillip Morton, Investors Offshore.com

11 January 2007

Early estimates show the HFN Hedge Fund Aggregate Average, an equal weighted average of all single manager hedge funds and CTA/managed futures products, finished the year on a positive note, although returns trailed that of the S&P 500 in 2006 as a whole.

Hedge funds in the HFN database were up 1.36% in December and finished 2006 up 11.76%. Although trailing the S&P 500 TR's 15.80%, 2006 was the best year for hedge funds since 2003, when they returned an average of 21.19%.

However, hedge funds have significantly outperformed the equities benchmark over the longer term; since 2001, the HFN Aggregate Average has increased by an annualized rate of 11.36% while the S&P 500 TR has an annualized return of 2.94%.

According to HFN, emerging markets were the place to be in 2006. Despite a turbulent summer, EM funds outperformed every other hedge fund strategy. The HFN Emerging Markets Average was up 2.84% in December and finished 2006 up 21.72%. The year ended strong for most emerging markets, with the noticeable exception being Thailand where the implementation of capital controls, though only lasting one day, caused the country's equity market to finish down over 8% in December.

The energy sector ended a volatile year on a soft note. The HFN Energy Sector Average was flat in December, down 0.01%, and up 12.23% for 2006, but returns are more impressive taking into account that while crude oil prices were an average of 16.5% higher throughout the year, natural gas prices were an average of 22.5% lower compared to 2005.

Equity related strategies were prime beneficiaries of global market trends. The HFN Equity Hedge Aggregate Average was up 1.89% in December and 12.93% in 2006, while the HFN Relative Value Aggregate Average was up 1.18% in December and 11.52% in 2006. The HFN Small/Micro Cap Average was up 3.34% in December and 19.48% in 2006. The HFN Healthcare Sector Average was up 0.52% in December and 14.76% in 2006.

Other strategies which had notable years were distressed and convertible arbitrage funds. Early in 2006 distressed assets were said to be over-bought after a mediocre 2005, but with no slowdown in global liquidity, the HFN Distressed Average ended December up 1.33%, increasing 14.64% in 2006. Convertible arbitrage funds were also said to be on a downtrend, but managed a surprisingly strong year; the HFN Convertible Arbitrage Average was up 1.59% in December and 12.78% in 2006.

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