Hedge funds droop but beat market

October was another tough month for hedge funds, as the ripple effects of the global credit crunch continued to force managers to unwind portfolio positions. The Hennessee Hedge Fund Index declined 5.5% last month, bringing the index’s year-to-date decline to 15.3%. The story was similar for the Credit Suisse/Tremont Hedge Fund Index, which lost 5.3% in October and was down 9.9% for the year. The Greenwich Hedge Fund Index, which also reported performance today, fell 5.1% in October and was down 14.3% over the previous 10 months. If there is a bright spot for the $1.7 trillion industry, it is that hedge funds appear to stack up relatively well against the stock market. The Standard & Poor’s 500 stock index, for example, fell 16.9% in October and was down 34% so far this year. Meanwhile, the Lehman Aggregate Bond Index lost 2.4% in October and was down just 1.7% year-to-date. “Massive deleveraging resulted in significant declines across the board, resulting in the worst month in history for most risk assets,” Charles Gradante, co-founder of Hennessee Group LLC in New York, said in a statement. “While many managers are seeing very attractive investment opportunities, they are struggling to retain investors and their capital bases,” he added. “Thus far, we have seen more funds freeze redemptions, utilize redemption gates, reduce fees and liquidate than in the history of the hedge fund industry.” Across most hedge fund databases, convertible arbitrage strategies took the biggest hit last month, while short-biased and managed-futures funds continued to stack up positive performance. According to Greenwich Alternative Investments in Stamford, Conn., convertible arbitrage strategies combined for a 20% average decline in October and a year-to-date decline of 35.2%. Short-biased funds, which had been hampered by temporary short-selling restrictions during part of September and October, gained 11% in October and were up 25.6% so far this year. Managed-futures funds, which tend to thrive in periods when market trends are most extreme, gained 6.6% in October and were up 16.1% on average this year, according to Greenwich Alternative Investments.