Not all bad news in hedge funds' annus horribilis

By Laurence Fletcher

LONDON (Reuters) - A handful of hedge funds has resisted the global crisis ravaging their rivals, reaping bumper returns in 2008 in a sign some niche players will always beat the market no matter how dire the outlook.

There is no single recipe to explain why CQS's Asset-Backed Securities rose 72.81 percent or Hugh Hendry's Eclectica fund 31.2 percent, other than that they doggedly clung to a strategy they thought would bring in the money.

"To many observers, my behaviour became increasingly erratic," Eclectica Asset Management partner Hendry wrote in his latest client letter.

"Rather than embrace risk, like everyone else, I shunned it ... I was written off as a gloomy character, one of life's perennial bears," he said.

His bearish stance paid off for his 79 million euro (71 million pounds) Eclectica fund, which made a huge 43 percent gain in October alone, profiting from a huge government bond position and cutting back on commodities.

Eclectica is one of a small group of funds living up to the industry's claim to always return money and to hedge against choppy markets from which it derives its name.

Colin McLean's Highlander fund gained 21.1 percent in 2008, while Crispin Odey's Odey European fund added 10.9 percent.

The results come as the average hedge fund lost 18.3 percent, according to Hedge Fund Research HFR.L, marking their worst year by far and only the second year in which they lost money since HFR started collecting data.

Hedge funds have suffered from extreme market volatility in 2008 and from illiquidity in bonds and stocks, as well as one-off events such as the more than quadrupling in Volkswagen (VOWG.DE) shares over several days.

The sudden rise massively damaged hedge funds betting on a drop in the shares by short-selling them.

The UK's temporary ban on short-selling financials is another reason why performance faltered.

CREDIT

Short positions on banks such as Iceland's Kaupthing Bank KAUP.IC and Royal Bank of Canada (RY.TO) helped Odey's 1.3 billion euro European fund shrug off a hit from the Volkswagen short squeeze.

However, 2009 looks like being another challenging year, Odey said, adding he is "quite depressed" because "no economy is remotely in the recovery position".

"I am happy to buy when faced with irrational fear, but the fear that I see around me today appears reasonably rational."