Financial Times – Hedge funds are frequently promoted as offering positive returns regardless of conditions in the markets. But the recent performance of funds of hedge funds, which offer the additional security of investing across a range of underlying funds, has cast doubt on these claims.

Dollar-denominated funds of hedge funds lost 1.4 per cent in value during the second quarter following the stock market reversal of May while euro, sterling and Swiss franc funds were also hit, according to a review by the fund analysis arm of Standard & Poor’s.

“We suspected that funds of hedge funds might be vulnerable to a correction in equities after portfolios took on a more directional appearance in the previous quarter,” says Randal Goldsmith, author of the review. “We did not expect that they might fare worse than equities but many actually fell more than related equity indices.”

The Cedar Fund, which uses a high degree of borrowing, experienced the most severe decline, of 6.4 per cent, while the GAM Emerging Markets Multi Fund, previously a strong performer, lost 4.2 per cent. Among euro-denominated funds of hedge funds, HDF Global Long-Short Fund fell 3.2 per cent while in sterling the Collins Stewart International Growth Fund fell 5 per cent.

“Funds have not done what it says on the tin,” says Justin Modray at Bestinvest, a retail broker. “Most funds have been launched in the last three years and up to the last quarter they have generally risen. But this has shown that they don’t always produce absolute returns.”

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