Hedge Funds Off to Good Start: Best in 6 Years

Dusten Carlson

Hedge funds are looking for in 2012. They're off to their best start since 2006, with the average gaining 4.94% in the first quarter according to information released on Monday.

Despite early gains, the industry's performance came in behind U.S. stocks, which posted their strongest first-quarter gains in over ten years this year. When Dow industrials ended the quarter, they were up 8.1%. The exceptional first-quarter performance clocks-in after three solid years of the industry slouching behind stock-market returns, with a more-or-less flat performance in March according to data released by Hedge Fund Research Inc.

Investors are saying that stocks and other securities aren't moving as neatly as they were most of last year, when "correlation" made it more difficult for hedge funds to bet on a company's performance, compared to others of its ilk. “The first quarter is characterized by fundamentals taking hold, unlike last year, when policy issues dominated,” says Girish Reddy, a managing partner of Prisma Capital Partners LP, a fund of hedge funds with $8 billion in assets. This isn't just true of hedge funds, according to Reddy. It also affects credit, bonds, mortgages, and equities.

Some strategies have returned more result than others. Funds trading in equities and event-driven funds returned larger gains. HFRI Equity Hedge Index gaining 7.3% in the first quarter and the Event Driven Index, 4.5%. Weakest numbers were posted by the average macro fund, up 1.2% over the same period of time. Hedge fund manager Reza Ali, of Prosiris Capital Management LLC, which manages $160 million and focuses on structured credit, is up more than 10% in the first quarter, says that going forward, the challenge is negotiating a more volatile environment. Uncertainty is introduced into the market via unexpectedly poor job numbers and concerns about the health of Spain and Portugal's economy. To wit, the jobs report triggered the recent decline in the Dow, which dropped 130.55 points (1%) to 12929.59 on Monday.

The European Central Bank’s long-term refinancing operation was “low-hanging fruit” that hedge funds should have taken advantage of, Mr. Ali says. “The question is, what do you do now?”