[New York, NY] January 8, 2008 - Early estimates show the HFN Hedge Fund Aggregate Average, an equal weighted average of all single manager hedge funds and CTA/managed futures products in the HedgeFund.net database, was +0.89% in December 2007 resulting in full year 2007 performance of +10.85%. The HedgeFund.net database consists of over 7,900 current hedge fund, fund of funds, and CTA products.

Positive hedge fund returns in December came amid a very a difficult environment, but that in itself defines the year for hedge funds versus equity markets; positive performance in the face of instability. For the full year 2007, aggregate hedge fund performance was the strongest versus equity markets since 2002, outperforming the S&P 500 Total Return Index by over 500 basis points.

During the majority of the bull market run from 2003 to 2006, hedge fund strategies took heat for underperforming equities. However, from 2003 to 2007, in the two years in which hedge funds outperformed equity markets (2005 and 2007) they did so by a cumulative 9.7%. Hedge funds have again proven to be a highly useful tool during periods of equity market volatility. In the past three years, hedge funds returned +35.31% while the S&P 500 TR was +28.16%.

In December it appears many funds were able to take advantage of strong moves in energy and precious metal prices and CTA managers specifically benefited the most. The HFN CTA/Managed Futures Average was +2.09% in December and finished 2007 +12.70%. The 2007 return marked the best year for CTAs by almost double any prior year’s returns since 2003. Full year 2007 returns for CTAs almost matched the strategy’s cumulative returns for three prior years combined.

Early results for energy sector hedge funds show an average return of +3.81% in December and the HFN Energy Sector Average was +17.53% in 2007. Many had predicted oil prices to either fall or remain flat in 2007, but as the commodity’s price approached $100 a barrel towards the end of 2007 hedge funds in the space took advantage. In the last four months of 2007, energy sector hedge funds returned +8.19%. The commodity’s bull run led energy hedge funds to be the second best performing specialty, lagging only emerging markets, in the last five years. In the last five years ending 2007 the average energy sector hedge fund was +166.92%, or a compound average annual return of +21.69%.

Emerging markets produced the best hedge fund returns in 2007, led by funds focusing investments in China and India. Despite significant volatility in December, emerging market hedge funds returns were positive, producing an average of +0.94% for the month. The HFN Emerging Markets Average ended 2007 +20.83%, the third consecutive year the benchmark has produced full year returns greater than 20%. Since 2001, the average emerging market hedge fund has returned +320.76%, or a compound average annual return of +22.79%.

Similar to CTAs, macro funds also experienced a renaissance in 2007 aided by strong moves in global currency and interest rate markets. The HFN Macro Average returned +1.66% in December resulting in full year 2007 results of +12.40%. In 2007, macro funds produced their best year of performance since 2003 and the second best year since 1999. In a testament to the average macro manager’s ability to judge global trends, macro funds appeared to position themselves correctly as credit markets entered their worst stretch in 2007. During the last four months of 2007, when global central banks were taking unprecedented measures to provide liquidity, macro funds returned almost 7% ranking it among the top five strategies in that time frame.

Long/short equity funds ended December +0.68% and the HFN Long/Short Equity Average was +11.71% in 2007. Long/short equity funds have best characterized the advantage hedge funds showed over equity markets not only in 2007, but in the last three years. The average long/short hedge fund has produced a cumulative return of +40.02% in the last three years while the S&P Global 1200 was +37.72% and the S&P 500 TR was only +28.20%. Historically, this outperformance only increased in times of equity market duress. For the two year period of 2001 through 2002 when the S&P 500 TR and Global 1200 were -31.40% and -33.36%, respectively, the average long/short equity fund was +5.50%.

Not every strategy produced solid results in 2007. The effects of extremely difficult credit markets were seen in several strategies. Distressed hedge funds were positive in December, +0.25%, but ended 2007 +6.25%, the worst year for distressed hedge funds since 2000. During the most difficult stretches for credit markets, August and November, the average distressed fund returned -1.49% and -2.06%, respectively. On the bright side, distressed funds have historically followed poor years with very good ones. After falling -4.53% in 1998, distressed funds returned +19.83% the following year. In 2000, distressed funds were +4.26%, but in 2001 were +15.92%. After returning +6.99% in 2002, the average distressed fund was +32.22% in 2003 and +17.90% in 2004.

Finance sector hedge funds were the most negatively impacted funds in 2007 and the only hedge fund strategy to produce negative full year results. With only a few funds reporting December performance, an indication that results will fall further, the average finance sector fund was +2.11% in December, however the HFN Finance Sector Average was -2.86% in 2007. The 2007 results mark the first negative year for these funds since 1999 and the first year any hedge fund strategy, outside of short biased funds, produced a negative result since convertible arbitrage in 2005.

A full report on December performance will be available at www.hedgefund.net later in the month.

Posted: 01|9|08 at 9:44 am. Filed under: Finance.