Most hedge funds made money in February, but some trend-following strategies and managers focused on the financial-services sector were hit by the sharp market sell-off late last month, Hedge Fund Research, a firm that tracks industry performance, said on Wednesday.
Hedge funds returned 0.65% on average in February as gains from earlier in the month helped offset the effect of sharp stock market declines on Feb. 27, according to early calculations from HFR. About a quarter of the managers HFR tracks have reported February results so far. That’s roughly average for this time of the month.
The gains leave HFR’s hedge fund index up 1.81% so far this year. The Dow Jones Industrial Average (INDU) lost roughly 3% in February and declined more than 1% during the first two months of 2007.
Merger arbitrage managers, who bet on the outcome of mergers and acquisitions, performed the best in February, gaining 4.6%, HFR reports.
“The sell-off in late February didn’t really impact any of the ongoing M&A deals and the leveraged buyout environment, which has helped a lot of merger arb managers, continues to be strong,” says Ken Heinz, president of HFR.
Some large hedge funds also had contrarian positions in credit markets, which paid off when credit spreads widened in late February, he adds.
Hedge funds that trade financial services stocks performed the worst, losing 2.9% on average in February, HFR reports.
Some of those losses may have been tied to problems in the subprime mortgage industry.
Second Curve, a $500 million hedge fund firm that holds shares of subprime lenders Accredited Home Lenders (LEND) and New Century Financial (NEW), has suffered big losses in early 2007.
The Second Curve Partners Fund lost 19.88% during the first two months of 2007, while the Second Curve Opportunity Fund lost 22.85% during the same period, according to two people familiar with the firm’s performance.
Macro hedge funds, which usually wager on broad economic trends using a wide variety of securities, lost 0.47% last month, HFR adds.
HFR’s macro index includes funds that use computer models to track market trends, as well as other funds run at the manager’s discretion.
The stock market slump on Feb. 27 hit computer-driven, trend-following hedge funds the hardest, Heinz says.
“That was a sharp reversal for these funds,” he explains. “Everyone was caught with a similar position on.”