Hedge Funds Held Their Own in February

Convertible, emerging markets and macro led month

CHICAGO (HedgeWorld.com)--Hedge funds held their own in February, but yielded little in the way of substantial returns in the last month.

Major hedge fund indexes reported gains below 1% across the board as convertible arbitrage, emerging market and global macro sectors recorded most of the industry's gains.

"January's rising market trend in the U.S. equity market stalled in February, and performance was almost unchanged," said Oliver Schupp, president of Credit Suisse/Tremont Hedge Fund Index, in a statement. The Credit Suisse/Tremont index was up 0.34% in February and the investable version of the index gained just 0.28%.

As a result of the U.S. equity markets' poor performance, long/short equity managers were unable to benefit on their net long positions, officials said. Short-bias managers also have suffered, dipping into negative territory with a loss of 2.6% for the year.

Managers with a global focus seem to be on top right now. For the first two months of 2006, emerging markets managers reigned supreme in the Credit Suisse/Tremont index with a 7.42% gain through Feb. 28. Six funds with an Asia investment focus were moved from the long/short equity sector to emerging markets. They are: Henderson Asia Pacific Absolute Return Fund Ltd.; Boyer Allan Pacific Fund; Martin Currie Absolute Return Asia Fund Partnership LP; Sofaer Capital Asian Hedge Fund; Tiedemann/Ayer Asian Growth and Wessex Asia Pacific Fund Ltd.

Global macro managers gained 1.23% in the Credit Suisse/Tremont index thanks to short positions in U.S. bonds. On the equity side, the Standard & Poor's Hedge Fund Index returns showed global ex-U.S. long/short equity managers up 5.37% after a good January.

The composite S&P Hedge Fund Index posted a gain of 0.8% in February, with eight of nine strategies landing in positive territory. According to S&P, hedge fund gains are due to a strong rally in convertible arbitrage, a busy merger and acquisitions market and anticipation of rising interest rates in Japan.

In its monthly investment newsletter, managers of the Japan Pragmatist Fund told investors that rising rates in Japan and elsewhere led to fears that global excess liquidity would be "curtailed." Officials emphasized that they expect corporate profits to grow, and they anticipate a greater disparity of Japanese corporate earnings that will lead to more long/short opportunities this year.

Convertible arbitrage players also are looking forward to more opportunities, thanks to better terms for holders to convert early and new convertible issues now carrying higher coupons, according to S&P. Arbitrage players in the MSCI Hedge Fund Composite Index (up 0.2% in February) also are on top with a gain of 0.7% for the month of February and a 2.4% gain so far in 2006.

In the Credit Suisse/Tremont index, convertible arbitrage funds gained 1.18% in February and are up 3.97% this year, which bests the overall index, which is up 3.57%. The investable index is up 2.14% so far in 2006, with the investable convertible arbitrage index gaining 1.28% in February and 2.49% in January.

SBarreto@HedgeWorld.com

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