Key Takeaways
- • Hedge funds gained 3.73% in October 2011, clawing back losses after five consecutive months of declines, but remain down 3.44% year-to-date according to the Barclay Hedge Fund Index.
- • The S&P 500 surged 10.93% in October—its best month since 1974 and first double-digit positive month since December 1991—significantly outperforming hedge funds for the month despite robust corporate earnings with 67% of reporting companies beating estimates.
- • Equity Long Bias hedge funds posted their strongest one-month gain since May 2009 with a 6.64% return, while Equity Short Bias funds declined 8.77%, underscoring the challenging environment for hedged and short-focused strategies.
- • Fund manager bearish sentiment reached 57% in late September, the highest level of 2011, causing managers to maintain elevated hedges that limited upside capture during October's market recovery.
- • The Barclay Fund of Funds Index gained 1.37% in October but remains down 4.47% year-to-date, reflecting broad underperformance of managed vehicles relative to broad market indices.
Summary
Hedge funds staged a partial recovery in October 2011, gaining 3.73% according to the Barclay Hedge Fund Index, yet the broader narrative remains one of significant underperformance through the first three quarters of the year. Despite the monthly rebound, the index stands down 3.44% for 2011 following what BarclayHedge characterized as "five long consecutive losing months" that devastated returns.
The October rally, while substantial for hedge funds, pales in comparison to equity market performance. The S&P 500 advanced 10.93% during the month, marking the best October performance since 1974 and the first double-digit positive monthly return since December 1991 according to the S&P Market Attributes report. This divergence highlights a critical challenge for hedge fund managers: their protective postures, while prudent given elevated market uncertainty, constrained participation in the sharp equity rebound.
Strong corporate earnings fundamentals underpinned the October rally, with more than 74% of earnings having been reported and 67% of reporting companies exceeding consensus estimates. Of the 18 hedge fund indices tracked by BarclayHedge, all but one posted gains. The Equity Long Bias Index led with a 6.64% jump, representing its largest single-month gain since May 2009. Conversely, the Equity Short Bias Index fell 8.77% but maintains a modest 4.53% year-to-date gain. Other beneficiaries included emerging markets, healthcare and biotech, and event-driven strategies.
Sol Waksman, founder and president of BarclayHedge, attributed hedge funds' relative underperformance to manager positioning ahead of the rally. A late September survey revealed bearish sentiment among fund managers had risen to 57%, the highest reading of 2011, causing many to maintain defensive hedges rather than fully capitalize on the equity market's sharp October advance. The Barclay Fund of Funds Index gained 1.37% in October but remains underwater at 4.47% for the year, reflecting ongoing challenges in delivering alpha-adjusted returns to institutional and family office investors.
The October rally, while substantial for hedge funds, pales in comparison to equity market performance. The S&P 500 advanced 10.93% during the month, marking the best October performance since 1974 and the first double-digit positive monthly return since December 1991 according to the S&P Market Attributes report. This divergence highlights a critical challenge for hedge fund managers: their protective postures, while prudent given elevated market uncertainty, constrained participation in the sharp equity rebound.
Strong corporate earnings fundamentals underpinned the October rally, with more than 74% of earnings having been reported and 67% of reporting companies exceeding consensus estimates. Of the 18 hedge fund indices tracked by BarclayHedge, all but one posted gains. The Equity Long Bias Index led with a 6.64% jump, representing its largest single-month gain since May 2009. Conversely, the Equity Short Bias Index fell 8.77% but maintains a modest 4.53% year-to-date gain. Other beneficiaries included emerging markets, healthcare and biotech, and event-driven strategies.
Sol Waksman, founder and president of BarclayHedge, attributed hedge funds' relative underperformance to manager positioning ahead of the rally. A late September survey revealed bearish sentiment among fund managers had risen to 57%, the highest reading of 2011, causing many to maintain defensive hedges rather than fully capitalize on the equity market's sharp October advance. The Barclay Fund of Funds Index gained 1.37% in October but remains underwater at 4.47% for the year, reflecting ongoing challenges in delivering alpha-adjusted returns to institutional and family office investors.
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