Hedge funds had a slightly positive month overall with a widening dispersion of returns among strategies, based on whether managers could take advantage of October's market volatility. The Chicago Board Options Exchange Volatility Index (VIX), that measures the implied volatility of S&P 500 Index options, began a surge of approximately 30% on October 23 that took the VIX from just over 20 to just over 30, as equity markets took a turn downward in the second half of the month. October's US equity gains for many Long/Short managers were concentrated in the industrial, utilities and health sectors, and from shorting financials. Some managers which have had positive returns in recent months have begun to take profits and wind down for the year, while others which have struggled due to their defensive positions earlier in the year continued to actively seek opportunities arising from the market volatility.

Macro data was mixed, with positive earnings momentum in the US and globally, as well as positive GDP growth figures for the third quarter in the US and China, and encouraging PMI numbers for the Eurozone (except the UK which saw its economy shrink by 0.4% in 3Q). On the other hand, PMI numbers in Singapore slipped to 50.2 from a peak of 54.4 in August, personal spending in the US dropped by 0.5%, and US consumer confidence dropped from 73.5% in September to 70.6%, according to the Reuters/University of Michigan Consumer Sentiment Index.

Certain managers in Equity Market Neutral and Relative Value strategies believe that the increase in market volatility may continue and will likely favor securities pickers who perform fundamental analysis. We believe sideways markets are also generally a better environment for arbitraging rather than long-biased, directional approaches. For example, Merrill Lynch reports that the convertible bond market was down for the first time since January, but Convertible Arbitrage managers had their 11th consecutive month of positive performance as they shifted their focus to arbitraging strategies rather than the long-only-type credit plays that were profitable earlier in the year. Equity Market Neutral managers also experienced a positive month and their performance relative to other hedge fund strategies improved, since its market neutral profile can give the strategy an advantage over those with higher market correlations when volatility rises.