Volatility hedge funds profit from market fear in November

Market uncertainty and heightened fear among investors sent volatility hedge funds to near the top of the returns table for the alternatives industry last month, as they rose 2.5%.

In contrast, the $2trn industry overall lost money for its investors last month, a 0.9% November fall leaving it down 4.4% so far this year.

The industry lost more value last month than both the S&P 500 and bonds, as represented by the Barclays Capital Government / Credit Bond index. Both benchmarks fell 0.2%. But it outperformed global shares, as MSCI World fell 3.2%.

“Most of the month was dominated by uncertainty on a resolution of the European sovereign debt crisis raising questions with investors about possible adjustment to the Euro currency,” said Kenneth Heinz, HFR’s president.

“In the current environment, funds are maintaining flexible, hedged and opportunistic positions across asset classes, balancing their core micro portfolio holdings with informed macro themes, while continuing to expect and anticipate directional volatility.”

Hedge funds’ performance this year is a world away from this time last year, when data analysts Hedge Fund Research Inc found all but one strategy – dedicated short sellers – had made profits, and most were up by more than 5%.

This year to November hedge funds specifically betting equity markets will fall are up 0.2%.

According to data monitors Eurekahedge computer-driven hedge funds also rose, by 0.7%. Eurekahedge said: “Trend followers posted the largest gains, with FX trades such as long dollar positions yielding significant profits. Long exposures to the Hang Seng Index negated some of the profits, however. Short-term systematic traders also finished the month with small gains on the back of short positions in bonds.”

Only four headline hedge fund strategies tracked by HFR made money this year. Apart from short sellers and volatility funds, the others are fixed income asset-backed (up 6.7%), merger arbitrage (1.5% higher) and relative value (0.41% up).

Other sub-strategies that made money are ‘yield alternatives’ (up 3.4%), private issue (up 8.6%), technology/healthcare (up 1.8%, and fixed income – corporates (up 0.5%),

Last month’s losses were concentrated in emerging markets strategies, which fell 3.1%. Asia ex-Japan was down most sharply, by 4.3%, while global emerging markets hedge funds fell least, by 2.1%.

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