Hedge Funds Beat S&P 500 in First Half of 2006

October 3, 2006 (PLANSPONSOR.com) - The HFRI Fund Weighted Composite Index was up 6.2% in the first six months of 2006, compared to a S&P 500 return of 2.7% in the same period, according to a press release from Mercer Investment Consulting (MercerIC).

In its latest hedge fund newsletter, MercerIC explains that hedge fund asset flows accelerated during the second quarter of the year as institutional investors felt pressure to achieve alpha and improve funding status of retirement plans, the release said. In the second quarter of 2006 the hedge fund industry took in more than $42 billion, compared to $24 billion in the first quarter.

According to the release, market-neutral strategies are often the alpha engine underlying portable alpha programs. At the end of 2005 these strategies accounted for approximately 21% of total hedge fund assets under management, according to Hedge Fund Research, which maintains a proprietary database on over 5,500 hedge funds.

To meet demand for alpha-oriented products, traditional equity managers have responded by developing short-enabled strategies encompassing a range of net exposures (total long positions less total short positions). These include equity market-neutral strategies (zero net market exposure), long-short equity funds (variable, but positive net exposure) and benchmark-constrained strategies (100% net exposure). Within the benchmark-constrained universe, the most popular choice of investors has been a “130-30” portfolio, according to MercerIC.

“For investors using short-enabled strategies, the biggest risks are manager competence and leverage,” Jeff Gabrione, a senior consultant with Mercer Investment, warned in the release. “Shorting stocks requires attention to different details and different skills than buying stocks. The most obvious difference is that a short position has, in theory, an infinite downside, whereas a long position can fall only to zero.”

More information can be found at www.mercerIC.com .