According to Hedge Fund Association, unlike the typical stock or mutual fund, hedge funds were profitable in January. The average U.S.-based hedge fund gained 0.5% net last month while the average offshore hedge fund earned 1.0% net. In contrast, all the major stock market benchmarks fell, disappointing those looking for the traditional January effect of rising markets following year-end selling. The S&P 500 and the Dow lost 1.5% and 0.9%, respectively, last month, while equity-based mutual funds averaged a 1.9% decline.
Hedge funds continue to shine, both on an absolute basis and relative to the markets. Since the onset of the market downturn in March 2000, the S&P 500 has posted 13 losing months. In 12 of those months, the Van U.S. Hedge Fund Index has beaten the S&P 500. Furthermore, every month in that period when the S&P 500 rose, the Average U.S. Hedge Fund made money as well. Hedge fund managers, who made money in the roaring bull market of the 1990s, have now shown the value of a hedged approach to investing as the market has faltered.
Nine of the fourteen strategies in the Van U.S. Hedge Fund Index were positive in January, with Short Selling topping the list with an average 5.2% net return. Such results aren t surprising, given the market s losses as the Enron scandal and accounting-related issues dominated the media. Short sellers have a history of shorting companies with questionable financial reporting, and those concerns prompted many investors to dump shares last month, benefiting short sellers. Emerging Markets was the second-best performing U.S. hedge fund strategy, posting an average 4.5% net gain for the month. While Argentina s woes have grabbed most of the headlines concerning emerging markets lately, major equity indices for countries such as Mexico, Russia, and Thailand showed strong returns in January.
Just over two-thirds of reporting hedge funds, both U.S. and offshore combined, posted net gains in January, with over 80% overall besting the S&P 500. The best performing strategies for January were U.S. Short Selling, U.S. Emerging Markets, and Offshore Short Selling, which averaged net returns of 5.2%, 4.5%, and 3.8%, respectively.