Broad hedge fund performance was down or flat for the end of 2011, with returns for the year in negative territory. There was some positive performance to be found in specific strategies.

Dow Jones/Credit Suisse
The Dow Jones Credit Suisse Hedge Fund Index was down 0.22% in December 2011. This was the second consecutive month of losses, although they were slightly more modest than the almost 0.8% drop in November. Most strategies were down or flat in December. Dedicated short bias had the best returns for the second month running, gaining 1.65% in December although this was a fall from the almost 3% gains achieved in November. Managed futures posted the second-highest returns, up 0.79% in December, holding on to the gains made in the previous month. The biggest losses came from long/short equity strategies, which were down 0.88% during December, with event driven (down 0.81%) a close second. Other strategies registering gains were convertible arbitrage (up 0.62%), fixed income arbitrage (up 0.38%) and global macro (up 0.43%).

FrontEdge Global Hedge Fund
FrontEdge Global Hedge Fund returned 0.1% in December 2011, compared with a negative 0.4% for the benchmark HFRI Fund of Funds Index. The fund is down 3.7% over the past 12 months, with volatility of 3.6% compared with a negative 5.5% and volatility of 4.6% for the HFRI Fund of Funds index. Six of the eight underlying hedge fund sub-strategies were positive in December. The best-performing strategy was managed futures, which gained 1.3% during December, followed by equity long/short and equity market neutral, both were up 0.5%. The synthetic replication blend was down 0.1%. The FrontEdge Global Hedge Fund is an investable fund of hedge funds index product from Frontier Investment Management designed to be representative of the broad hedge fund universe with strategy selection and allocation inspired by the major hedge fund indexes. It combines investments in around 50 single hedge fund managers with a significant allocation to a blend of synthetic replication products.

HFRX
Hedge funds concluded a challenging year with a decline in December; the HFRX Global Hedge Fund Index was down 0.42%, with performance for 2011 down 8.9%. This is only the second full-year decline since the HFRX index’s inception in 1998. Absolute return posted a decline of 0.13% for December and 3.7% for 2011. Relative value gained 0.11% in December with positive contributions from convertible arbitrage (up 0.32%) and yield alternatives: energy infrastructure strategies. Fixed income-based multi-strategy, asset-backed and energy infrastructure sub-strategies all gained in 2011, with multi-strategy gaining 0.05% for 2011. Event driven and macro posted declines of 0.56% and 0.28% respectively in December. Both were down 4.9% for the year. Macro systematic diversified and merger arbitrage had gains of 0.82% and 0.07%, respectively for the month. Equity hedge strategies were one of the weakest performers for December, down 0.85%, partially offset by market neutral strategies which gained 0.18%.

Lyxor
The Lyxor Global Hedge Fund index was down 0.36% in December, taking 2011 performance to negative 6.59%. Market worries over the European debt situation prevailed during the month. Risk assets fell at the start of the month but then generally recovered. CTAs and arbitrage-oriented managers (merger arbitrage, convertible arbitrage and statistical arbitrage) were able to take advantage of these conditions. Managed futures traders were generally able to post positive returns for the month. CTAs gained 1.3%. The Lyxor Special Situations Index declined 2.1% on the month, ending a difficult year for the strategy. Credit markets experienced limited liquidity and notable volatility, yet spreads generally tightened over the month. The Lyxor Global Macro Index was flat on the month. Fixed income specialists were able to monetise some of the volatility and post positive returns. Equity market managers ended the year with modest net and gross positions, which were generally much lower than the risk taken at the beginning of 2011. Variable bias managers generally displayed muted returns. The correlations among stock returns remained at extreme levels, yet there was enough volatility in the market for some of the quantitatively-oriented managers to add value.