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Hedge funds regain momentum as markets resume upward climb

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Hedge funds finished November in positive territory as global stock markets resumed their upward trend, according to a report by Lipper.

The Lipper Hedge Fund Composite Index was up 0.90 per cent in the month of its launch.

Equity hedge and directional strategies outperformed credit-focused and relative value managers for the month.

The best performing strategy for November was managed futures, posting a solid return of 2.45 per cent month on month, followed by option arbitrage (+1.42 per cent) and long bias (+1.24 per cent).

Trend followers were able to regain momentum on bullish trends in the stock markets and on long positions in a number of commodities, especially gold.

US dollar carry trade strategies were popular among macro managers (+0.96 per cent) and contributed to boost portfolio performance as the Australian dollar appreciated 1.77 per cent month on month in November against the US dollar.

Reversing the previous month’s reading, the worst performing strategy in November was dedicated short bias (-0.08 per cent), the only strategy posting a negative return.

Global stock markets (as measured by the MSCI World TR Index) rebounded 4.14 per cent for November. In line with worldwide picture US equity markets rallied, with the S&P 500 TR Index jumping nearly 6.00 per cent, completely cancelling out the 1.86 per cent decline for October. The rally of all three major US stock indices paused, however, following the news on 27 November of Dubai’s debt crisis, which sparked investor fears about the start of another financial crisis.

Developed markets jumped 4.43 per cent month on month, with only four of the 22 developed countries in the red. All emerging markets (+4.25 per cent) except Egypt (-16.11 per cent), Morocco (-6.53 per cent), and Turkey (-6.60 per cent) posted gains.

Nowhere was the rally more pronounced than in Latin America (+8.33), with Peru (+11.97 per cent) outperforming, as all countries posted solid performance. November also registered gains in BRIC shares, with India (+8.38 per cent) and Brazil (+8.15 per cent) contributing mostly to the reading.

The equity hedge styles—and especially long bias managers—posted solid performance for November. All ten sectors included in the S&P 500 Index registered gains for the month, with materials (+11.35 per cent), healthcare (+9.01 per cent) and industrials (+8.68 per cent) being the winners on the performance league sector table for November. Large and mid-cap stocks beat small-cap stocks, and growth stocks outperformed value stocks for the month.

Event driven managers (+0.46 per cent) performed relatively well for the month, benefiting mainly from performance of distressed-debt securities. US high-yield markets posted positive returns for the ninth consecutive month despite little spread movement, closing at 1.01 per cent according to the Merrill Lynch High Yield Master II Index.

The most speculative CCC-rated tier (+1.76 per cent) once again outpaced the higher-rated BB (+0.77 per cent) and B (+0.78 per cent) sectors. Nevertheless, the European high yield market (-0.22 per cent) posted a loss for the first time since February 2009 on concerns about Dubai World’s request for a debt standstill and on Greece’s worsening public finances.

Risk arbitrage managers delivered solid returns as corporate activity rebounded on confidence returning to the market. Global M&A volume reached USD305bn for November, the highest monthly volume for the year and the first time the total volume surpassed the USD300bn mark since July 2008.

The USD35.9bn bid for railway company Burlington Northern by Warren Buffett’s Berkshire Hathaway and the USD23.1bn spin-off of Canadian utility Cenovus Energy, both announced in November, were among the year’s largest M&A deals.

Commodities advanced 2.60 per cent month on month for November (+20.85 per cent year to date), according to the Reuters/Jefferies CRB Index. Gains in commodities were propelled by a weaker US dollar, advances in global stock markets, and US interest rates staying on a declining pattern.

Gold soared to a fresh record high in November, returning 13.50 per cent, according to the S&P GSCI Index. Industrial metals (with aluminum, copper, lead, and zinc driving the rally) and agriculture sectors also sustained the performance of the index.

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