Hedge funds, futures managers and commodities outperformed equity markets in the volatile month of October.
Despite negative returns overall in hedge funds and managed futures, investors in those arenas are happy with their performance given the disappointing returns seen in stock markets worldwide.
Although a few hedge fund and futures managers were hit hard, particularly those specializing in emerging markets, in general the strategies performed as expected, consultants and managers say. As a result, October's volatility has made some hedge funds and futures-based strategies look good.
While managed futures managers were able to outperform stocks, the industry did take a public relations hit from the collapse of Victor Niederhoffer's futures funds and hedge funds.
"The hedge funds did what we paid them to do, which was to hedge," said Robert Schulman, president of Tremont Advisors Inc., Rye, N.Y., a manager of managers and consultants.
"The whole theory of non-correlation stood up pretty well, with a couple exceptions," said L. Hunt Taylor II, executive director with hedge fund and futures consultant TASS Management Ltd., New York. "Strangely enough, it was a relatively boring month," Mr. Taylor said, in reference to hedge fund and futures managers.
The equity markets were anything but boring, with the Standard & Poor's 500 Stock Index producing a total return of -3.34% in October, after individual days of big market swings.
Hedge fund manager portfolios, which are usually priced for clients at most once a month, were down slightly. The Hedge Fund Research Composite Index was down 1.41% in October, while the Hennessee Hedge Fund Index was down 0.71% and the EACM 100 Index was down 0.7%.
"I think there was a significant degree of diversification" in certain strategies, said Patrick Moriarty, senior vice president with Evaluation Associates Capital Markets Inc., Norwalk, Conn., which manages hedge fund managers and compiles the EACM 100.
Hedge fund performance was strong, particularly on a risk-adjusted basis, he said.
Nonetheless, hedge funds with long equity biases were hurt in the October market, Mr. Moriarty said.
Mr. Schulman of Tremont said that in general hedge funds performed well in a period of market turmoil. That wasn't the case in 1994, when markets were hit by sharply rising U.S. interest rates.
He said there were exceptions: "Obviously, the emerging markets group did not do well."
"Hedge funds performed in a manner you'd expect in a market like October's," agreed Charles Gradante, managing principal for Hennessee Hedge Fund Advisory Group, New York.
Hedge funds as a group were down slightly, but those in emerging markets were down about 6%, Mr. Gradante said.
He said a popular hedging strategy, shorting Japan stocks as a hedge against U.S. equity exposure, might have buffered losses among hedge funds.
The idea is to try to neutralize some of the U.S. exposure with shorts in Japanese stocks, which would be expected to fall more than U.S. stocks in a broad market sell-off.
"Japan, on a global basis, is the best short out there," he said. "It's like shorting a bad stock."
Pure short sellers, meanwhile, performed strongly, posting a return of more than 11% in the month, he said.
Long positions in commodity futures, as tracked by various passive commodity indexes, had a relatively strong October. The widely used Goldman Sachs Commodity Index returned 2.75% in October. Meanwhile, the Daiwa Physical Commodity Index returned 1.76% and the Investable Commodity Index returned 1.07%.
Most commodities weren't affected by the volatility in the equity markets, said Gregory S. Oberholtzer, managing director for Forstmann-Leff International Inc., New York. Gold, which typically has been a safe haven, was one of the biggest losers for the month.
Barring exceptions such as the Niederhoffer funds, managed futures posted returns that beat stock market indexes. Commodity Trading Advisors returned -0.5%, according to preliminary numbers at Managed Account Reports, New York; and -1.31% according, to Barclay Trading Group Ltd., Fairfield, Iowa. The Mount Lucas Management Index was up 1.68% in October. (The MLM index uses a simple computer program to simulate trend-following futures strategies.)
Mr. Niederhoffer's losses would have affected only his relatively small group of investors; his funds were too small to have a big impact on indexes, said Richard Pike, president of RP Consulting Group Inc., St. Petersburg, Fla.
"The Niederhoffer thing was an isolated event. It attracted a lot of attention because he went belly-up," said Sol Waksman, president, Barclay Trading Group. "It was just an ordinary month, for the most part."
