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10 Jan 2007

HFN Reports 2006 as Good Year for Hedge Funds

Early estimates from HFN Hedge Fund Aggregate Average shows plus 1.36% in December and finished 2006 at almost plus 12%. Although trailing the S&P 500 TR's +15.80%, 2006 was the best year for hedge funds since 2003 when they returned an average of just over plus 21%.

Since 2001, the HFN Aggregate Average has increased by over 11% while the S&P 500 has a yearly return of 2.94%, HFN reports an equal weighted average of all single manager hedge funds and CTA/managed futures products in the database, the database consists of over 7,000 current hedge funds and fund of funds.

Emerging markets were the place to be in 2006. Despite a turbulent summer, EM funds outperformed every other hedge fund strategy. The HFN Emerging Markets Average was +2.84% in December and finished 2006 +21.72%. The year ended strong for most emerging markets with the noticeable exception being Thailand where the implementation of capital controls, though only lasting one day, caused the country's equity market to finish down over 8% in December.

The energy sector ended a volatile year on a soft note. The HFN Energy Sector Average was flat in December, -0.01%, and +12.23% for 2006, but returns are more impressive taking into account that while crude oil prices were an average of 16.5% higher throughout the year, natural gas prices were an average of 22.5% lower compared to 2005.

Equity related strategies were prime beneficiaries of global market trends and other strategies which had notable years were distressed and convertible arbitrage funds.

US and Europe Conduct Joint Probe into Hedge Fund Lending

US and European regulators are conducting a joint probe into banks and securities firms to see if they are setting careful limits when lending to hedge funds.

Officials want to know how much margin banks require hedge funds to provide up front to obtain loans and cover potential losses. They're hoping to avoid the kind of turmoil that engulfed financial markets when Long-Term Capital Management LP's losses forced the Fed to organize a rescue in 1998.

The SEC, the Federal Reserve Bank of New York and the UK Financial Services Authority last month met with top lenders to the hedge-fund industry asking about the amount of collateral required by prime brokers for loans. Officials from Germany, and Switzerland are also taking part. strict enough limits on loans to hedge funds.

“We are doing work on credit-risk management with the SEC,” David Cliffe, a spokesman for the FSA, said. “It's looking at the prime brokers in relation to the hedge funds.'' The Swiss Banking Commission in Bern has worked with British, US and German authorities on the issue.