With returns so far this year of a monthly average of 1.24%, hedge funds have been playing tortoise to the hare of the Dow Jones Industrial Average and the S&P 500, both of which surged by some 15% during July to September. Hedge funds in our general database returned an average of 1.4% in August, while funds with significant commodity exposure returned rather less, 0.67%, lagging the recovery that the commodity sector posted at the end of the quarter.

Returns for funds in energy turned positive, to 0.70%, while those in metals returned 0.93%, and soft's funds returned 0.83%. We are due another month of data before we can pass judgment on our fund's performance for Q3. But maybe the hare is running short of breath. Key macroeconomic data at the end of Q3 was contradictory; increased consumption spending was reported in the US, but unemployment is still rising, although at a slowing pace. While the world economy decides if it is really recovering from recession, the hedge fund industry could do worse than its current chugging along.

Managed money continues to pile into gold, according to CFTC data issued as of 13th October: net long positions increased from 220,386 to 238, 493 on the week with open interest for the Comex contract a hefty 671,445 lots. Money managers became more enthusiastic about prospects for Comex copper, reducing their net short position of 2,391 lots to turn net long by 1,016 lots, while in silver it increased from 41,967 to 42,599 lots.

Hedge Funds Outlook

The announcement by the United States Natural Gas Fund (USNGF) that it will preemptively rebalance its portfolio of natural gas investments in anticipation of a CFTC clamp-down on position sizes, by reducing positions in listed natural gas futures in favor of increasing holdings of over-the counter natural gas swaps, is a sign of things to come. Regulatory zeal has just become one more thing to hedge against - inevitably some will do it more successfully than others. The USNGF managed to re-jig its portfolio to include such a so-called "regulator's hedge", while retaining a majority of its holdings in listed natural gas futures; smaller funds might find this sort of move more difficult to pull off. But tighter regulation will simply spur hedge funds to more sophisticated ways of handling business.

News on Hedge Funds activity

Oct 16th: A draft EU Directive on hedge funds and private equity funds could potentially lose pension funds in the UK $2.1bn each year, according to a study commissioned by the Financial Services Authority. The EU's Directive will restrict pension funds to investing only in those hedge funds and private equity funds that are domiciled in the same region - hugely restricting their scope for investment.

Oct 14th: HSBC will start an EU-regulation compliant fund of hedge funds which will be available through its branch network, with a minimum investment start of $37,000. The fund is one of many recently launched to offer investors an opportunity to invest in hedge funds that comply with the EU's Undertakings for Collective Investments in Transferable Securities (UCITS III) regulation.

Oct 8th: Chicago based Hedge Fund Research (HFR) estimated that metal's funds in their data sample outperformed other commodity funds this year. Although the HFR metals index, which tracks metal's funds, lost 1.7% during August, the index is up almost 20% on the year.

Oct 7th: CFTC head Gary Gensler is concerned that draft revisions of the Obama Administration's derivatives legislation will provide loopholes for financial operators to side-step regulation.

Courtesy: Fortis Metals Monthly