DB Absolute Return Strategies, a unit of Deutsche Asset Management, reports that the hedge fund industry is outperforming equity markets so far this year.

The firm manages approximately US$5 billion in hedge fund assets in single and multi-manager hedge fund strategies in over 120 different hedge funds. Across this range of products, funds are down 1% on average net of fees. Hedge funds as a group are generally preserving value and significantly outperforming equity markets this month and year-to-date.

Josh Weinreich, global head of DB Absolute Return Strategies, states, “The vast majority of funds are reporting month-to-date performance of plus to minus 3%. The exceptions are some of the short-biased equity managers and global (macro) asset allocators who are approximately up 5% to 15%. The relative performance of multi-manager strategies to the broader markets is excellent and equally important, the volatility of these returns is a fraction of other investment alternatives.”

Arbitrage or relative value strategies, which tend to balance long and short positions, have generally held up well. Merger arbitrage managers are generally down this month but flat to up for the year. Long/short equity managers have been holding large cash positions and keeping net exposures low.

“We see exposures at less than 25% net long in most cases,” says Ray Nolte, global head of multi-manager funds for DB Absolute Return Strategies. Year-to-date most of these managers remain positive while the major equity benchmarks are down between 25% and 35%.

The difference between this market environment and 1998 is the result of two factors according to Weinreich. First, the model of having large, highly leveraged managers investing in a wide range of strategies and aiming for outsized returns has generally given way to more specialized market-neutral arbitrage players and long/short equity managers.

Second, negative market conditions during the past 18 months have caused many hedge funds to be defensively positioned with little to no leverage and low net (long) exposures to the markets.