NEW YORK (HedgeWorld.com)–Hedge funds made their best returns in recent months on the S&P Hedge Fund Index, which ticked up 1.45% in November.

Returns were led by directional/tactical and event-driven managers, which made gains on short U.S. dollar positions and long-equity index holdings as the dollar fell and equities inched forward after the U.S. presidential election, according to Standard & Poor’s.

Directional and tactical managers, such as long/short equity, macro and managed futures were up 3.29% on the S&P Directional/Tactical Index. According to S&P’s analysis, the materials sector was profitable as demand from China and Asia overall continues to grow, and as volatility, churned up by the health-care sector due to Merck’s problems with its arthritis drug Vioxx, aided hedge fund performance.

Volatility was still mostly in neutral, though, last month, with U.S. long/short equity managers gaining only 3.27% in comparison to the S&P 500 Index’s November gain of 3.86%. Managed futures managers also performed well because of market dynamics.

“Volatility again entered the energy markets in November as most futures contracts had significant retracements off their highs due to reports of increased oil production,” said Justin Dew, senior hedge fund specialist at Standard & Poor’s, in a statement.

He added that the psychological effect of a large Chinese speculator reporting losses of more than US$550 million on short volatility trades added to the performance of the managed futures sector. The managed futures sector is the best-performing index, up 5.68% for the year through Nov. 30, with much of that gain occurring in November, with the S&P Managed Futures Index up 5.39%.

Event-driven funds were up 1.43% for the month, led by an upturn in distressed investing focused on key positions in energy companies that came out of bankruptcy in early November. For the year, event-driven strategies are up 4.27%.

Arbitrage managers had a dismal month. Strategies such as fixed-income arbitrage encountered federal funds rate increases that made a dent in bond yields, and convertible arbitrage players found it difficult to generate profits against narrowing spreads. The S&P Arbitrage Index was down 0.32% in November and up only 1.43% for the year to date.

Because of scarce investment opportunity for arbitrage managers, the composite index is up only 2.62% for the year to date. That S&P index is representative of an equal weighting of all hedge fund investment approaches in nine specific strategies: equity market neutral; fixed-income arbitrage; convertible arbitrage; merger arbitrage; distressed; special situations; equity long/short; managed futures; and macro.

Contact Bob Keane with questions or comments at: bkeane@investmentadvisor.com.