Despite some encouraging signs of improvement in the global economy, hedge funds across the board struggled to make gains and underperformed compared to equity markets.

Last year ended with HFRI Equity Hedge Index gaining 7.39 percent overall while S&P 500 was up 16 percent. Similarly, BAML reports a 5.63 percent increase in the Global Diversified Hedge Fund index in last year making it the fifth worst year in the period of 1995-2012, according to BAML hedge fund montior’s sources.

While there is a lot of room for improvement, 2012 was still better than what we saw in 2011 when the same Global Diversified Hedge Fund index was down -5.10 percent and the benchmark HFRI Equity Hedge Index lost -8.38 percent, making returns on both indices, the second worst in the last eighteen years.



The best performing strategies through last year were, Distressed Credit (+9.61 percent) and Event Driven (+9.10 percent) while Short Biased (-14.31 percent) and Managed Futures (-3.13 percent) returned the least.

BAML’s year-end report also  mentions an interesting correlation between S&P500’s performance and Eurodollar positioning. Apparently the correlation has been at its strong, since 2007 at 74 percent. The current holding of Eurodollar positions from Committment of Traders data point to a bearish future for the equities going forward. The Eurodollar indicator peaked on sell side in November which predicts a market correction in the first half of 2013.

S&P 500 vs Eurodollar


Across assets, the highlights in hedge fund exposure is the large specs moving to sell S&P 500, flipping the prevalent trend of buying observed in 4Q12. Gold is nearing the buy zone while yen exited the crowded short zone as large specs covered their positions in the new year.

Hedge funds were stacking longs in 10 yr Treasuries in the last update, in the first week of the month the readings exited crowded long for 10 yr treasuries and hedge fund sold fixed income futures across the board. A summary of how hedge funds were positioned across multiple asset classes as of 8th January is as follows:

Buy: NASDAQ-100 (INDEXNASDAQ:NDX), Copper, Platinum, Crude oil, Heating Oil, Gasoline, USD

Net Long: Heating Oil

Crowded Net Long: S&P 500,  Crude oil

Approaching Crowded Long: Heating Oil

Sell: S&P 500 (S&P Indices:.INX), Russell 2000, Soybean, Corn, Wheat, Gold, Silver, Palladium, Euro, 30 yr Notes, 10 yr notes, 2 yr notes

Net Short: Natural Gas, Yen, Wheat

Approaching Crowded Short: Wheat