Early estimates indicate the Credit Suisse/Tremont Hedge Fund Index will finish down 0.45 per cent in February.

Early estimates indicate the Credit Suisse/Tremont Hedge Fund Index will finish down 0.45 per cent in February.

Volatility in global equity markets was fuelled by an adverse feedback loop between the financial sector and the economy in February, creating opportunities for hedge funds to capitalize on market swings.

Royal Bank of Scotland in the UK, AIG in the US, and UBS in Switzerland all posted the highest corporate losses in recent times for their respective countries. Hedge funds continued to decouple from equity markets and outperformed the MSCI World Index by 10.04 per cent in February and by 17.9 per cent year to date.

Credit Suisse says this can be attributed, in part, to many hedge funds taking short positions, defensively positioning themselves with reduced net exposures to equity markets, tactically harvesting market volatility, and being less constrained by the deleveraging process that hamstrung some managers in the fourth quarter. The dedicated short bias strategy looks to be the biggest winner for the month with an estimated return of 4.09 per cent.

Bond markets saw an issuance of USD300bn of investment grade paper in January and February, one of the largest issuances in a two-month period. Capital markets may be picking up the strain of financing from beleaguered banks. Hedge fund managers were generally long two-year Treasuries and added to their net short positions in 10- and 30-year Treasuries in anticipation of the bearish steepening of the US yield curve.

Convertible arbitrage showed solid gains following a strong January performance, with continued liquidity and increasing demand. Global macro managers had mixed performance, although a range of themes were profitable, including divergence trades within European sovereigns (expressed largely through credit default swaps and Eastern European currencies) as well as the steepening of the US yield curve.

Credit Suisse adds that recent events affecting the markets, such as President Obama's USD787bn economic stimulus package combined with bank rescue plans and other initiatives, could cause markets to stabilise by mid-year and possibly lead to a tepid recovery in late 2009 or early 2010.