Hedge funds probably recorded their highest monthly return of the year in September, Credit Suisse Group AG said, as the benchmark gauge for U.S. equities posted its biggest rally for the month since World War II.
The Credit Suisse Liquid Alternative Beta Index, which tries to replicate hedge funds’ returns, climbed 3.6 percent last month amid an 8.8 percent surge in the Standard & Poor’s 500 Index. The gain was the largest since a 3.1 percent jump in July, when the S&P 500 rose 6.9 percent.
Credit Suisse’s Long/Short Liquid Index, one component of the beta index, contributed the most to the gain, rising a record 5.4 percent. The long/short strategy involves buying equities expected to increase in value and selling short shares that are expected to decline. The Event-Driven Liquid Index, which tracks funds trying to capitalize on company events such as mergers, spinoffs and earnings reports, rose 4.7 percent.
“Alternative strategies deliver great risk-adjusted returns with the opportunity to generate returns in equity market rallies,” said Peter Little, the New York-based head of portfolio management for alternative beta strategies at Credit Suisse. “Directional strategies — event-driven and long-short equity — participated in that.”
The Merger Arbitrage Liquid Index posted a gain of 2 percent, and is 7.6 percent higher this year.
“There’s been a lot of talk of excess cash on companies’ balance sheets and that points to a strong merger environment,” Little said. “That’s going to be a great story in 2010 and continue to dominate the news.”
Hedge funds posted their worst performance in May, when the CSLAB index fell 2.6 percent, compared with a drop of 8.2 percent in the S&P 500. The CSLAB index shows hedge funds may have returned 5.5 percent this year, compared with a 2.3 percent gain in the S&P 500 through Sept. 30.
“The stock market for the year is pretty close to flat and hedge funds are up 4 or 5 percent for the year,” said Sol Waksman, president of Fairfield, Iowa-based BarclayHedge Ltd. “So they don’t do as well in the strong up months, but they outperform in a down month.”
Credit Suisse’s Liquid Alternative Beta, or LAB, indexes seek to replicate the aggregate returns of hedge funds’ alternative investment strategies. The index uses an algorithm to replicate the returns of specific hedge fund strategies, such as carry trades, risk arbitrage and volatility arbitrage.
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