By Susan Hogg Despite ongoing market turmoil, hedge funds with a short bias showed significant gains...
By Susan Hogg
Despite ongoing market turmoil, hedge funds with a short bias showed significant gains during the later part of 2000, with many managers edging back into the black by the end of October, according to the CSFB/Tremont Hedge Fund Index.
The CSFB/Tremont Index is the sector's first asset-weighted index and shows that dedicated short-bias funds led the hedge fund sector during September and October, when they gained an average 10% and 6% in dollar terms, respectively. These gains mean short-bias funds have gained 0.9% in dollar terms in the year to date.
Geneva-based Stephan Woernle, founder of EuroCapital Fund Management, a fund of hedge funds, said: "I think 2000 will prove to have been the year of the hedge funds. The idea of a hedge fund has always been to do well when markets are not too good. This ideal has been disappointed in the past few years with the collapse of Long Term Capital Management (LTCM) and the winding up of some of the major macro funds.
"In addition, a lot of the hedge funds were heavily into Russia when it blew up and so many have failed to fulfil their promise.
"That has really been the case until this year. Indeed, this year it has really only been the Asian hedge funds that have been slaughtered by the markets. They really have not held their own in Asia, but that is not the case in Europe or the US."
The conventional wisdom has been that hedge funds, even long/short equity hedge funds, have a natural long bias, and that they fall when the markets fall.
This has usually been put down to a lack of expertise among managers to master short-selling disciplines.
Woernle said: "Performance has been very good in Europe and exceptional in some arbitrage strategies, which have worked well on a worldwide basis. Some of these strategies are quite cyclical and I would not anticipate that they would continue to do so well."
A lot of money left the arbitrage sector following the collapse of LTCM but there has been a marked return to the sector since the third quarter of 1998.
In line with this renewed interest the sector has performed relatively well. However, the real surprise, according to Woernle, has been the strong performance of European hedge funds.
"They have always been better at shorting stocks in the US. It was really only a problem in Europe where there was more of a long bias."
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