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Maybe Hedge Funds Were Best In 2001 . . . Maybe

by Carla Johnson, Investors

28 December 2001

The Credit Suisse First Boston Tremont hedge fund index for the first 11 months of the year showed average gains of 3.2% in the 11 months to November, easily outperforming equity indexes, which averaged a loss of 18.3%; but to get a positive return on your hedge fund you had to be quite selective - returns ranged from minus 4.8% on long-short equity funds to plus 15.53% on global macro funds. And some funds bit the dust in a big way: one of the worst performers, London-based Weavering Capital - a global macro fund - lost 95% of its value.

Event-driven funds - which bet on takeover bids, bankruptcies and other corporate restructurings - grew 10.3%; convertible arbitrage funds - which exploit tiny imbalances in the pricing of related securities - grew by 14.2%.

2001's 3.2% gain has to be compared with an average over the previous seven years of 11.6% growth; and investors who chose to try to minimise risk by investing indirectly in the sector through so-called funds of funds, which charge an extra layer of performance fees, will have done even worse. 'It's been a difficult year for hedge funds,' said industry expert Jacob Schmidt of Allenbridge. 'Investors have been protected on the downside, but it has been disappointing on the upside.'

The averages conceal lots of much better or worse results, of course, but on the whole those investors who have fled equity funds will be congratulating themselves. The giant, $21.4bn Janus Worldwide Fund, for instance, has fallen 24.5% in value this year, trailing nearly three-quarters of its rivals. However, it still is ranked at the top of the world stock fund category over the last 10 years, with an average annual return of 14.2%, according to fund tracker Morningstar Inc. And that beats hedge funds, interestingly, perhaps proving that in the long run, you can't beat the market. Or again, perhaps not. Who knows?

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