The best performing strategy for hedge funds, so far in the year, has been convertible arbitrage. CA has turned the highest profits year to date. Bank of America Merrill Lynch (BAML)’s Hedge fund monitor reports a 5.32 percent gain on its Investable Hedge Fund Composite Index performance in this strategy. Briefly, convertible arbitrage is a market neutral approach, which combines the acquisition of a company’s convertible securities with shorts in the same company’s common stock.

The flash return on the hedge fund composite index was down 0.64 percent in the month of October. Till October 17 the index was up by 0.19 percent so the negative performance accumulated in the last weeks of the month. The -0.64 percent on the HF composite index beats the -1.98 percent performance of S&P 500 (S&P Indices:.INX) in the same time period.

The performance noted till November 1, identifies that equity market neutral hedge funds lost the most ground and the strategy was down 5.32 percent. The next big performers were the event driven approach and the equity L/S strategy, which gained 4.32 and 4.2 percent respectively, on the index.

Investor confidence is on the rise as leverage increased 20 percent y-o-y to $315 billion, which is above the average of $285 billion. This increase indicates that investors are positive about the market’s future and are therefore adding leverage.

S&P 500 vs Margin debt

The significant changes from the last report is a preference for large caps and a maintenance of shorts in EMs. In the last update, large hedge funds tilted towards small caps and shorts in EMs were covered. In commodities Platinum, corn and crude oil have exited the crowded long position. In case of corn this is a first since August. The trend was towards selling metals in the last month. Hedge funds continue to cover shorts on USD, buy 10 yr treasury notes, buy S&P 500 (S&P Indices:.INX), and sell NASDAQ 100. Shorts in euro, JPY, and Russell 2000 were added to in October.