CHICAGO — Shorting equities was by far and away the most profitable strategy in the fourth quarter, according to performance data from Morningstar Inc.’s hedge fund database.
The average performance of 13.23% by managers in Morningstar’s Short Equity hedge fund was nearly eight percentage points more than managers in the next highest category, Global Trend managers, where the average was 5.38% in the fourth quarter.
By shorting equities, managers in the best-performing sector avoided negative returns of every major equity index in the fourth quarter as well as the 3.0% return of the Lehman Brothers U.S. Aggregate Bond index. The S&P 500 was down 3.33% in the quarter, the Wilshire 5000 index was down 3.22%, the Russell 2000 index was down 4.6% and the Morgan Stanley Capital International Europe Australia Far East index was down 2.04%.
Average performance across all 17 of strategy categories was 1.64% for the quarter. Emerging Market managers averaged 4.3%, while Global Non-Trend (mainly global macro fund) managers averaged 4.23%. Average returns of the other 13 strategy categories were less than 2%, with three categories dropping into negative territory — Corporate Action managers, which averaged -0.08%; Multistrategy funds, which averaged -0.85%; and Developed Asia Equity funds, which were down an average of 1.28%.
(See charts of top performing hedge funds and top performing hedge funds by category.)
Daniel V. Farkas, Morningstar’s resident hedge fund analyst, said what struck him most about aggregate returns was that most strategies were positive, indicating many hedge fund managers took advantage of increased market volatility. “Of course, given the environments, short traders did extremely well,” he said.
Mr. Farkas noted the continued outperformance of emerging market specialist funds, pumped as they were by hot returns from India, China and Russia in particular. By way of evidence, Mr. Farkas pointed to the two best performing hedge funds for the quarter across all categories with more than $100 million in assets: the Monsoon India Inflection Fund LP, which returned 47.38%, and the Monsoon India Inflection Fund 2 LP, with a 45.11%. Monsoon Capital LLC, Bethesda, Md., manages both funds.
“Being in the right place really helped, and funds that had short positions in subprime mortgages, for example, did quite well,” Mr. Farkas added. One manager in the right place shorting subprime assets was Balestra Capital Partners LP, which had the third-best performing fund with a 40.42% return for the period. The manager is Balestra Capital Ltd., New York
Mr. Farkas said hedge funds in the Global Trend category — which tend to manage a lot of managed futures, commodities and currencies — also had a good quarter because no sharp changes happened in global trends. For example, the U.S. dollar remained weak throughout the quarter, and many hedge fund managers benefited from their short bets on the American currency.
Still, the fourth and fifth best-performing hedge funds were macro funds from Mormingstar’s Global Non-Trend category. Clarium LP, managed by Clarium Capital Management LLC, New York, returned 30.89%, while Quantitative Global Fund (3X), managed by Quantitative Investment Management LLC, Charlottesville, Va., returned 28.73%.
Weak performance in the Corporate Actions strategy also resulted from the credit crunch that plagued the quarter as available capital for mergers and acquisition activity dried up, making it hard for event-driven and merger arbitrage managers to find alpha. Mr. Farkas said many hedge funds with a value bias, such as activist hedge funds, found it hard to make money in the fourth quarter for the same reasons.
