Hedge fund indexes take nose dive in 3rd quarter

Hedge funds indexes plunged into sharply negative territory in the third quarter and year-to-date Sept. 30, reversing the trend toward flat to positive performance in the first six months of 2011.

In most quarters, returns of hedge funds-of-funds indexes tend to lag returns of indexes that track multistrategy and single-strategy hedge funds by at least 100 basis points, but with a -4.73% return in the third quarter, the HFRI Fund of Funds Composite index bested other indexes.

The next best performing index in the three-months ended Sept. 30 was the -5.4% return of the Greenwich Global Hedge Fund index, followed by the HFRI Fund Weighted Composite index, -5.5%; the HFN Hedge Fund Aggregate index, -5.86%; the Dow Jones Credit Suisse Core Hedge Fund index, -6.80%; and the Hennessee Hedge Fund index, -7.15%.

Third-quarter returns were the fourth worst quarterly returns in hedge fund industry history, according to Hedge Fund Research, trailing only the -9.6% quarterly return of the HFRI Fund Weighted Composite index in third quarter 2008, -9.2% in fourth quarter 2008, and -8.8% in third quarter 1998. Hedge Fund Research produces the HFRI indexes.

“September was another challenging month for hedge funds, capping one of the worst performance quarters in history, driven largely by increased European sovereign debt risks. Stock markets are normally driven by fundamentals, with the key element being earnings per share and growth expectations. The market was driven down in the third quarter, not because stock fundamentals were poor, but because of the fear factor stemming from the European sovereign debt factor,” said Charles Gradante, co-founder of Hennessee Group, in an interview.

“In response, managers have significantly reduced gross and net exposures in line with increased volatility,” Mr. Gradante said.

Hennessee Group produces the Hennessee Hedge Fund index.

Despite the losses, hedge fund index returns outperformed both the S&P 500 and MSCI World index in the quarter. The S&P 500 returned -13.84% for the quarter ended Sept. 30, while the MSCI World returned -16.46%. The Barclays Capital Aggregate Bond index return was 3.82%.

Hedge fund returns also were negative in the nine months ended Sept. 30, but as in the third quarter, lost less than half as much as the S&P 500 return of -11.44% and the MSCI World’s return of -15.48% year-to-date. The BarCap Aggregate Bond index, by contrast, returned 8.99% year-to-date Sept. 30.

The Eurekahedge Hedge Fund index topped the ranking for the nine-month period ended Sept. 30 with a -4.02% return, followed by the HFRI Fund Weighted Composite, -4.74%; Eurekahedge Fund of Funds, -4.89%; Greenwich Global Hedge Fund, -4.9%; HFRI Fund of Funds Composite, -5.02%; HFN Hedge Fund Aggregate, -5.28%; Hennessee Hedge Fund, -5.53%; and Dow Jones Credit Suisse Core Hedge Fund, -7.84%.