Hedge fund returns likely ticked down in February, according to the Credit Suisse/Tremont Hedge Fund Index, although they far outperformed equity markets.

Early estimates indicate the broad hedge fund index will finish down 0.45% for February (based on 59% of assets reporting). Distressed strategies were weakest, losing an estimated 1.7% in the month, whereas the dedicated short bias strategies gained about 4.1%.

While they lost money, hedge funds outperformed the markets, the firm reports. “Volatility in global equity markets was fueled by an adverse feedback loop between the financial sector and the economy in February, creating opportunities for hedge funds to capitalize on market swings,” it notes, adding that the MSCI World Index was down 10.5% in the month.

Credit Suisse/Tremont Hedge Fund Index reported that bond markets also saw issuance of $300 billion of investment grade paper in January and February, one of the largest issuances in a two-month period. “Capital markets may be picking up the strain of financing from beleaguered banks. Hedge fund managers were generally long two-year Treasuries and added to their net short positions in ten- and thirty-year Treasuries in anticipation of the bearish steepening of the U.S. yield curve,” it observes. “Convertible arbitrage showed solid gains following a strong January performance, with continued liquidity and increasing demand. Global macro managers had mixed performance, although a range of themes were profitable, including divergence trades within European sovereigns (expressed largely through credit default swaps and Eastern European currencies) as well as the steepening of the U.S. yield curve.”

The firm says that initiatives such as the U.S. economic stimulus package, bank rescue plans and other efforts leads Credit Suisse research to believe markets could stabilize by mid-year and possibly lead to a tepid recovery in late 2009 or early 2010.

IE