Svea Herbst-Bayliss
Fri Apr 9, 2010 6:27am EDT

(Reuters) – Global hedge funds gained about 3 percent in March, their biggest rise since September, as rallying financial stocks pushed many of these loosely regulated portfolios higher, data released on Thursday showed.


According to industry consultants at the Hennessee Group, the average hedge rose 3.05 percent last month after inching up 1 percent in February and starting 2010 with small losses of 0.5 percent. Since January, the average fund has gained 3.5 percent, the data showed.

Data from Hedge Fund Research show that group’s HFRI Fund Weighted Composite index up 2.7 percent last month for a 2.56 percent gain in the first quarter.

During the first three months of 2010 the average U.S. stock fund climbed 5.67 percent, according to industry research firm Lipper.

“Investors remain willing to assume greater levels of risk, and equity markets rallied sharply in March,” Charles Gradante, one of Hennessee Group’s co-founders, said about hedge funds’ gains last month.

Performance numbers are closely followed by hedge fund industry analysts to gauge the $1.5 trillion industry’s health and how much money wealthy investors might commit later.

Strong gains at some of the industry’s biggest and most prominent firms helped push the overall index up last month and put these normally secretive managers back in the spotlight, according to people who had seen the numbers but were not allowed to speak about them publicly.

John Paulson, one of the industry’s savviest investors who correctly bet three years ago that housing prices would fall, delivered double-digit returns when his Recovery fund gained 13.24 percent in March. Paulson’s firm manages roughly $32 billion and late last year he made bigger bets on financial stocks, according to regulatory filings.

Daniel Loeb’s Third Point also gained, with his offshore fund rising 8 percent after the fund manager disclosed in regulatory filings that he had added financial stocks Citigroup and CIT late last year.

The Hennessee Group’s financial equities index gained 5.36 percent while its distressed index climbed 5.32 percent. The Asia-Pacific Index gained 5.28 percent and the emerging market index was up 5.47 percent.

While hedge funds made money in March, their returns fell short of the average stock index. The Standard & Poor’s 500 index gained 5.88 percent last month and the technology heavy Nasdaq Composite Index rose 7.14 percent.

Part of the reason may be that managers were still cautious, Gradante said.

Still the industry’s strong showing so far this year should pave the way for more assets to flow. Demand is expected to increase especially at pension funds as some of the country’s biggest are being forced to fund bigger-than-expected gaps between what they must pay retirees some day and the money they set aside for these payments.

Not surprisingly, the hedge fund industry’s worst performers last month were so-called short sellers, managers who bet exclusively that share prices will drop.

The short-biased index lost 5.24 percent last month to be off 5.60 percent for the first quarter.

Prominent firms that lost money last month — although they are not exclusive short sellers — include David Einhorn’s Greenlight Capital which was down roughly 1.3 percent since January. Billionaire investor Carl Icahn’s fund slipped about half a percent, people who had seen their numbers said.

(Reporting by Svea Herbst-Bayliss; Editing by Matthew Lewis and Richard Chang)