The Eurekahedge Hedge Fund Index shed 3.9%1 in October, amid supremely choppy markets (the volatility index, VIX, breached a record-setting 90 points during the month), brought on by an environment of tightening credit conditions and heightening expectations of a global economic slowdown; the MSCI World Index and the Reuters CRB Index shed 19.1% and 18.3% respectively.
The sharply volatile and down-trending markets, coupled with redemption pressure from investors, continued to weigh heavily on hedge fund managers. As a result, the composite Eurekahedge Hedge Fund Index has had its worst two months in nearly a decade, in September (-5%) and October 2008. But these figures mask the phenomenal job that fund managers have been doing in terms of stemming losses and outperforming the markets, especially in an environment of deleveraging.
Gains during the month followed themes similar to those in September; trend-following strategies in the equity and commodity (short), and currency (long USD/JPY) markets drove performance in October (CTA, macro), while portfolio-deleveraging and re-pricing of credit hurt opportunistic and market neutral strategies (relative value, event driven etc). The chart below shows the current-month, previous-month and year-to-date index returns across strategies.
As outlined in previous months, our overall outlook for the hedge fund industry remains positive. While the past two months have seen decade- and generation-wide lows in most asset classes that are still seeking a bottom, a case can be made for very attractive valuations in a medium- to long-term investment horizon. The hedge fund industry is witnessing some of the biggest asset outflows in over three years, but we also continue to see less risk-averse investors seeking entry into previously closed funds, or retaining their current allocations in view of substantial future gains.