Cautious Hedge Funds. . .

In 1998's first quarter, most hedge funds lagged far behind the U.S. stock market, which gained 14% as measured by the S? 500 index. Global funds with bearish positions on Asian markets posted the highest returns. Short-sellers had another tough quarter, losing an average of 11.5%.

Strategy	1998 First Quarter Performance
Relative Value	3.0%
Long/Short Equity
Long undervalued equities/short overvalued equities	2.4
Convertible Hedging
Long convertible bonds or preferred/short underlying common	3.6
Bond Hedging
Yield curve arbitrage or long/short debt positions	2.2
Rotational/Multi-Strategy
Multiple relative value strategies, including those listed above	3.9
Event-Driven	13.8
Deal Arbitrage
Long and short equity securities of companies involved in corporate transactions	3.7
Bankruptcy/Distressed
Long undervalued securities of companies usually in financial distress	6.4
Multi-Event
Long and short based on deals, bankruptcies and other events	6.5
Equity Hedge Funds	18.2
Domestic Long Equity
Long undervalued U.S. equities/short selling used sparingly	6.2
Domestic Opportunistic Equity
Long and short U.S. equities, with ability to be net short overall	3.8
Global/International Equity
Primarily long undervalued equities, with some ability to sell short	10.4
Global Asset Allocators	16.8
Discretionary
Long or short markets based on qualitative/fundamental analysis	5.9
Systematic
Long or short markets based on trend-following or other quantitative techniques	3.1
Short Selling
Short sale of U.S. equities with expectation of price decline	-11.5
Evaluation Associates' 100 Index	4.1
S&P 500	14.0

Questions:

1. What are some of the problems of comparing hedge fund performance to the S&P 500?
2. How would you adapt your performance evaluation to look at hedge funds?
3. How would you judge the performance of short selling equity funds?