February could be a good month for hedge funds

BOSTON - IRONICALLY, this week's sharp market declines may have been good for hedge funds.

While no final performance numbers for February have been released, consultants and investors who track hedge fund returns said the loosely regulated portfolios would likely post small gains. Mutual funds, however, will likely nurse losses.

Preliminary data from the Barclay Group show the average hedge fund slipped 0.27 per cent last month, said Mr Sol Waksman, the group's president. But with data from only about 100 funds recorded, he expects the overall number to be positive soon.

The Hennessee Group expects the average hedge fund to have returned between 1 per cent and 1.25 per cent last month after rising 1.48 per cent in January, its principal Charles Gradante said.

That may come as a surprise after the market tumbled on Tuesday and slipped for most of Thursday and as talk swirled that some hedge funds - no names were given - suffered such large losses that they will have to shut down.

Funds focusing on Asian stocks and riskier mortgages were said to have been especially vulnerable.

Hedge funds suffered their heaviest single-day losses ever on Tuesday, according to data from Hedge Fund Research. But investors also said many funds fared very well.

Certain arbitrage strategies that bet stocks would fall but bonds would rise, did well as equities tumbled and investors preferred the safety of bonds.

Similarly, some global macro managers were said to have made money on the bet that the dollar would decline, and a few players who put on contrarian bets that equities would fall, also fared well, the industry trackers said.

Indeed for some hedge funds, Tuesday's decline was a blessing because it finally delivered a chance for these funds, which use trading techniques such as selling stocks short, to differentiate themselves from mutual fund.

'When the market is going up, hedge funds can't outperform. But when you have corrections like this one, that is where the rubber hits the road and hedge fund can do better than mutual funds,' Hennessee's Mr Gradante said.

REUTERS