1/10/2012 08:04:50 AM

Hedge Funds Suffered a Dismal Year in 2011

Hedge funds concluded a challenging 2011 with a decline of 4.8% for the year.

(January 10, 2012) -- Hedge funds concluded a bleak year for 2011, posting one of their worst performances ever, according to new data released by Hedge Fund Research (HFR).

According to the research firm, the average hedge fund sank a total of 4.8% in 2011, compared to rising by more than 10% the previous year. In contrast, the Standard & Poor's 500 stock index ended 2011 roughly flat.

“Volatile and unpredictable market dynamics throughout the year created a challenging environment for hedge funds in 2011, with aggregate losses across currency, commodity, Emerging Markets and equity strategies related to the European currency and sovereign debt crisis,” said Kenneth J. Heinz, President of HFR, in a statement. “Risk-off trades dominated 2011, creating challenges for convergence oriented funds, while contributing to gains across fixed income and certain low net exposure hedged strategies. After a challenging 3Q, hedge funds adapted strategies to this continuing macro-volatility dynamic in 4Q in anticipation of this environment persisting into early 2012.”

HFR noted that two strategy areas ended 2011 with gains in December, including Macro (+0.16%) and Relative Value Arbitrage (+0.50%) strategies; Fixed Income-based Relative Value was the only strategy area of positive performance for full-year 2011, gaining +0.55%, while Macro declined by -3.6%. Event Driven posted a narrow decline of -0.01% in December and -2.65% for 2011.

Earlier this month, Singapore-based Eurekahedge Pte. revealed that total asset flows for the year for hedge funds were $67 billion, lifting the size of the overall industry to $1.72 trillion.

Latin American hedge funds provided the best returns for 2011, gaining 2% over the year, Eurekahedge found. The second best performing region was North American hedge funds, even though it was in negative territory for the year, with a drop of 0.8%.

Despite the bleak year for hedge funds, an annual survey by the UK-based National Association of Pension Funds recently showed that pension money is going into hedge funds at a faster rate than other asset classes. The firm found that the allocation to hedge funds has risen from 2.6% to 4.1% over the last year.

Contact the writer of this story:Paula VasanPaula VasanManaging Editor, aiCIO646-308-2742pvasan@assetinternational.comFollow on Twitter at @ai_CIO