Hedge fund indexes on plus side but lag stock indexes

Hedge fund indexes that have reported third-quarter returns were universally positive but trailed major equity indexes.

In the three months ended Sept. 30, the HFRI Fund Weighted Composite index led its peers with a 2.86% return, followed by 2.67% for the Hennessee Hedge Fund index; 2.63% for the Eurekahedge Hedge Fund index, and 2.56% for the eVestment/HFN Research Hedge Fund Aggregate.

The HFRI Fund of Funds Composite index was not far behind in the third quarter with a 2.34% return.

By contrast, the S&P 500 index returned 6.35% for the quarter, while the Russell 3000 index came in at 6.23% and the MSCI ACWI produced a 6.97% return.

Although the Barclays Capital U.S. Aggregate Total Return Bond index trailed at 1.59% during the three-month period, credit-oriented hedge fund strategies “stole the show in Q3 2012, leading all major exposures during the quarter (with a return of) 3.8%” for the credit strategies subcategory index, according to eVestment/HFN Research's September Hedge Fund Report.

Credit strategies, which enjoyed eight months of positive performance in the first nine months of the year, also led all other eVestment/HFN subcategory indexes with an 8.7% return year-to-date Sept. 30.

Most broad hedge fund indexes produced single-digit positive returns for the nine months ended Sept. 30, with the Barclay Hedge Fund index leading at 5.99%. eVestment/HFN's Hedge Fund Aggregate trailed with a 5.05% return year-to-date; Hennessee Hedge Fund index, 5.03%; HFRI Fund Weighted Composite index, 4.65%; Greenwich Global Hedge Fund index, 4.6%; Eurekahedge Hedge Fund index, 4.23%; and, Lyxor Hedge Fund index, 2.2%. The HFRI Fund of Funds Composite index produced a 3.33% return.

The S&P 500 and Russell 3000 indexes ran neck-and-neck with 5.18% and 5.17% returns, respectively, year-to-date Sept. 30. The MSCI ACWI index also brought home a strongly positive return of 21.67% in the first nine months of 2012. As in the third quarter, the year-to-date return of the Barclays Capital U.S. Aggregate Total Return Bond index lagged equity indexes with a 5.16% return.

The current quarter may bring good things to hedge fund managers, said Charles Gradante, managing principal at Hennessee Group, in the firm's most recent performance report.

“In recent years, the fourth quarter has been good for risk assets. Most (managers) are expecting more of the same in 2012,” Mr. Gradante wrote, adding a measure of caution, “however, there is a possibility of short-term volatility as markets turn their attention to the November elections and the fiscal cliff. The biggest risk right now is a failure to address the fiscal cliff effectively and minimizing the drag on GDP next year.”