The Eurekahedge fund of funds index was virtually flat in September (+0.02% returns).

But there was a major hedge-fund-industry-specific market event during the month: Amaranth Advisors, a $10bn (€7.9bn) Connecticut-based multi-strategy fund, lost 35% of its assets in natural gas positions (natural gas prices fell over 30% during the month) and nearly another 35% in forced liquidations of other positions to meet margin calls. The liquidation of Amaranth’s significant portfolio also triggered a spate of liquidity-driven selling in the markets. Amid this backdrop, most fund of funds strategies too had a flat to mildly negative month, with event driven funds turning in the best performance at 0.5% as M&A was the dominant theme for the month (for instance, in Europe alone, Endesa received a bid from Eon, and there were rumours of an EMI-Turner tie-up as also those of private equity interest in a potential Corus-Vivendi tie-up). This, coupled with rallying equities, catalysed the performance of equity long/short funds of hedge funds as well (+0.4%).

On the other hand, tight credit spreads and flat yield curves limited opportunities for fixed income funds, while commodity-focused funds took losses stemming primarily from positions influenced by the dramatic sell-off in the energy markets.

In terms of regions, the best returns for the month were posted by funds allocating to the emerging markets (+0.4%) and, more specifically, to Asia (+0.3%). Funds investing in Europe and the United States had relatively much flatter returns. The one exception to this trend was North American equity long/short funds of funds (+1%) which benefited from the continued strength in American equities (both the S&P500 and Dow Jones indices were up ~2.5% each for the month).

Global fund of funds performance was largely flat, despite rallies in global equities and treasuries due to the ‘beta’ driven rally in the equity markets excluded many of the value stocks where hedge funds and funds of funds usually invest, while plunging energy prices and flattening yield curves restricted avenues for returns in the CTA and fixed income strategies.

For the latest September 2006 returns and YTD returns for the Eurekahedge hedge fund and fund of funds indices please visit www.eurekahedge.com/indices.

Rajeev Baddepudi is hedge fund analyst with Eurekahedge in Singapore

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