Performance by Investment Region

Among funds by investment region, those allocating to Asia ex-Japan were the clear leaders for the month, up a spectacular 3%. This was in stark contrast with October's performance numbers, where the region was a loss-leader. Key equity markets such as those in Korea, Australia and India were already on the rebound towards the end of October and long/short funds (typically long-biased in Asia), multi-strategy and relative value funds were able to catch the uptrend early on. Japanese funds, continuing on their upward trek in an expansionary regime, chalked up returns of 2.7% on average. Even the relatively under-performing regional funds, viz European and North American funds, when considered on a stand-alone basis, fared rather well recording healthy gains of 1.7% and 1.6% respectively. The chart below gives a snapshot of the performance of the Eurekahedge regional hedge fund indices during the month. A more elaborate analysis of the various regional market and performance trends is carried out in a later part of this write-up.

Eurekahedge Performance Indices (Regions)

Performance by Investment Strategy

The following chart depicts the comparative performance of various Eurekahedge hedge fund strategy indices. As is evident from the chart, CTA/managed futures funds registered the most gains for the month with the corresponding Eurekahedge index up 4%. For commodity allocations, these robust returns were primarily owing to the uptrend in precious metals in general, and gold exposure in particular. During the month, gold prices rallied from US$468 an ounce to nearly US$500, reaching an 18-year high. On the managed futures front, these funds largely benefited from currency positions exploiting the weakness in the Japanese yen against the US dollar and the euro. The yen dropped 15% against the US dollar to a 32-month low.

Multi-strategy funds were the next best performers (+2.4%). The trading environment for long/short funds proved a little choppy despite the market upswing (both the S&P and the NASDAQ Composite reached new 4-year highs, up 3.5% and 5.3% respectively, as they repositioned their trading books precisely to take advantage of this upswing. Consequently the corresponding Eurekahedge index closed the month slightly lower at +2.3%.

On the other end of the strategy returns chart were convertible arbitrage and fixed income funds, returning a marginal 0.3% each for the month. While the former had to cope with further concerns over year-end redemptions and further dips in market volatility during the first half of the month, the latter were affected by relatively flat credit markets. One instance severely impacting these two groups of funds was the crisis at the power major, Calpine, whose CFO left the company during November. This event unearthed problems within the company previously unnoticed by the market. Calpine's bonds fell 50% and its convertibles, 80%. However, the situation was not entirely grim, as November was the strongest month this year in terms of new convertibles issuance.

North America
Europe
Japan
Asia ex-Japan
Latin America

North America

Markets at a Glance

The US equity markets rallied in November as evidenced by the rise in the S&P index (3.5%) and the NASDAQ Composite (5.3%). Strong economic data (for instance, jobs numbers returned to pre-Katrina levels and home sales surged), and lower energy prices resulting in moderate inflation, were the main catalysts in this rally. The lower energy prices (West Texas Intermediate oil prices fell from US$59.8 to US$57.3) were a result of warmer-than-expected weather in the US during November. Small- and mid-cap stocks generally outperformed their large-cap peers, a trend that could only have helped skilled stock pickers.

In the treasury markets, the Federal Reserve once again raised its funds rate by 0.25%. The yield curve flattened further with short-term rates on the rise and long-term rates moving downwards. 10-year yields ended the month six basis points lower at 4.5%.

In the currency markets, the US dollar strengthened against both the euro and the Japanese yen, appreciating from yen 116.4 to 119.8, and from euro 0.83 to 0.85.

Hedge Fund Performance

In the North American markets, CTA/managed futures funds were the top revenue earners for the month, gaining a solid 2.8% on average. A strong US dollar, and a rally in the precious and base metals markets played catalyst. Long positions in equity indices accounted for the bulk of gains for most macro fund managers, who benefited from the clear trends and low volatility, and posted healthy returns at 1.9%.

Convertible arbitrage and fixed income funds, on the other hand, had a flat month with returns of 0.3% and 0.1% respectively. Fixed income players on the short side suffered when the treasury markets rallied in the earlier part of the month. The treasury curve also further flattened later in the month. Among convertible arbitrageurs too, fixed income and volatility players were the most hurt and dragged the index down.

Strategy	Nov 052	Oct 05	YTD 2005	2004	2003
Convertible Arbitrage	0.29%	0.13%	1.97%	5.31%	12.58%
Distressed Debt	1.67%	0.86%	7.19%	19.83%	31.88%
CTA/Managed Futures	2.8%	-0.64%	0.35%	5.27%	16.30%
Event Driven	1.79%	-2.28%	5.67%	16.01%	28.76%
Fixed Income	0.08%	0.08%	3.95%	10.73%	14.38%
Long/Short Equities	1.72%	-1.69%	6.30%	9.31%	23.10%
Macro	1.86%	-0.46%	9.32%	6.29%	33.62%
Multi Strategy	0.70%	-1.27%	3.79%	12.89%	19.50%
Relative Value	0.55%	-1.03%	4.90%	11.82%	25.15%
Eurekahedge North American Hedge Fund Index	1.56%	-1.17%	5.19%	9.77%	21.46%

Outlook

The short-term outlook for US hedge funds looks positive in an environment of robust economic data, eased inflationary pressures, a strengthening dollar and declining oil prices, whetting investors' risk appetites at least in the near term. There is also positive market-specific data to look forward to. For instance, in the convertibles space, new issuance continues to be robust and investment bankers look to fill the calendar before year end.

Europe

Markets at a Glance

In Europe, equity markets inched upwards despite the announced hike in the ECB's benchmark rate, as the ECB indicated that that would not be the first of a series of hikes. Trends were along the lines of those seen in the US equity markets, with small- and mid-cap equities turning out strong performance. A return of liquidity to and confidence in the emerging markets in Eastern Europe, M&A activity in the equity markets, lower volatility and positive trends in energies and other commodities, helped funds secure solid gains. The MSCI Europe Index gained 3.1%. Oil related sectors were the only exception to the general trend of recovery from October's lows. The strongest of the European markets was the DAX which posted a return of over 5%, while the UK market dragged.

Interest rate markets in the European Union moved up during the beginning of the month but reversed the losses completely in the second half of the month.

Energies continued to have a rough month in November owing to persisting warm weather and the concomitant sluggishness in demand. The problem was further compounded by new supplies hitting the western European and US markets.

In the currency markets, the euro ended the month weaker against the dollar, as markets took in benign inflation numbers and a less hawkish ECB, which signalled that any rate increases would be limited.

Hedge Fund Performance

Among European hedge funds, multi-strategy and long/short funds capitalised on the bullish equity markets and registered the most gains, ending the month 2.3% and 2.1% higher, respectively. Skilled stock pickers in these funds also benefited from the fact that small- and mid-cap equities outperformed the large-cap players in the markets. For instance, Italian financial stocks Unicredito and Fondiaria Sai, both rose by 12%; Spanish media company Telecinco moved 10% higher; and paper producer Holmen was up 9%. The best performing sectors were insurance, tech stocks and electronics.

In contrast with their US counterparts, CTA/managed futures funds were the worst performers for the month in Europe, posting negative returns of 0.2%. Warmer-than-expected weather in the US put a damper on oil demand and oil prices and the continued slump affected players in energies and related stocks. Fixed income funds also had a bad run during the month amidst flat yield curves and high volatility.

Strategy	Nov 051	Oct 05	YTD 2005	2004	2003
Arbitrage	1%	-0.09%	2.90%	4.89%	3.68%
CTA/Managed Futures	-0.22%	-0.84%	0.46%	-7.45%	7.44%
Distressed Debt	0.70%	-0.41%	7.78%	17.26%	34.12%
Event Driven	1.08%	-1.51%	7.71%	10.12%	10.6%
Fixed Income	-0.55%	-1.36%	3.37%	9.32%	19.31%
Long/Short	2.07%	-2.23%	11.38%	10.26%	10.59%
Multi Strategy	2.33%	-2.83%	11.98%	13.84%	12.01%
Relative Value	1.03%	-1.24%	6.33%	5.71%	9.22%
Eurekahedge European Hedge Fund Index	1.72%	-1.98%	9.84%	9.13%	10.36%

Outlook

The outlook for European equities is largely positive with reasonable valuations, good earnings growth, and a continuing high level of M&A activity. Also, the relatively higher economic growth, low interest rates and a weak currency are all conducive to investor confidence in the region.

Japan

Markets at a Glance

Equity markets had a strong rally in November owing to a return of liquidity into the markets, increased capital spending and upward revisions to growth estimates. The Nikkei was up 9.3% and the TOPIX 6.3%. Sectors sensitive to interest rates such as insurance and banks were among the worst performers over the month as expectations grew that the Bank of Japan will stick to its zero interest rate policy. Given that Japan is now in the global spotlight as a "hot market", inflows are now seeking yen-sensitive stocks, making the bullish run even more broad-based.

Yield differentials dominated the weakening of the yen, as Japanese investors continued to invest in foreign sovereign debt and politicians lobbied with the Bank of Japan to continue with the loose monetary policy. Also the US dollar strengthened on expectations of higher interest rates.

Hedge Fund Performance

With equity indices in Japan reaching new 5-year highs, it comes as no surprise that funds allocating to equities, such as event driven and long/short funds, had a terrific run in November, posting returns of 7.3% and 2.5% respectively. Many event driven funds have also added to their M&A positions in several mergers with due dates in early 2006.

Relative value funds, on the other hand, were the only negative return generating strategy at -1.4%. These funds, especially the ones relying on technical and assets-based signals, were hit by the fact that investors focused almost exclusively on earnings revisions without much consideration for valuations.

Strategy	Nov 051	Oct 05	YTD 2005	2004	2003
Long/Short	2.52%	1.65%	16.85%	8.78%	16.29%
Multi Strategy	1.96%	1.48%	9.83%	26.68%	26.74%
Relative Value	-1.38%	-1.22%	2.28%	6.42%	6.07%
Event-driven	7.30%	3.42%	37.36%	32.25%	2.18%
Eurekahedge Japan Hedge Fund Index	2.68%	1.59%	16.81%	10.54%	18.37%

Outlook

If the Bank of Japan succumbs to political pressure concerning continuance of the zero interest rate policy, it would produce a prolonged period of negative real interest rates, which in turn is good news for a range of assets including equities. Given the market expectations on the likelihood of this, the outlook for opportunities in the Japanese markets continues to be very positive.

Asia ex-Japan

Markets at a Glance

During November, most Asian equity markets strongly rebounded from October's lows. The MSCI Far East ex-Japan Index was up 7%. Strong US economic data and positive Fed comments eased investors' concerns about growth and interest rates. This easing of investor concerns was particularly evident in Taiwanese technology stocks, which had borne the brunt of the risk-averse investing of the previous months and finally got into positive territory.

In China, there were signs that the authorities were accelerating foreign access to the market, and some shareholding reforms. The Hang Seng Index was up 3.8% and the H-share Index was up 5.5%. November also saw a notable increase in the number of small-cap IPOs, in turn increasing the investment opportunities on offer. There were nine IPOs in November, eight of them finding their way into the secondary market. Also, the first ever Link Real Estate Investment Trust issued by the government performed rather well, up over 30%.

The Korean market (up 10%) rallied strongly, partly triggered by major deregulation announcements by the Financial Supervisory Service.

Indian equities rallied strongly as foreign investors became net buyers, bringing liquidity into the market to the tune of US$902 million. MSCI India returned 9.9% for the month. Economic data show no signs of retreat, and market sentiment on India is very upbeat. GDP growth remains strong despite higher energy costs, with the third quarter growth figure at 8%.

The Australian equity markets too returned close to all-time highs, with the S&P/ASX200 up 4.5% for the month. Speculations about an end to the Fed rate hikes and the declining oil price, have contributed to the solid gains, despite economic data falling below market expectations. The Australian dollar weakened against the US dollar, and bond yields fell ten basis points from 5.5% to 5.4%.

Hedge Fund Performance

Again unsurprisingly, given the booming equity markets in Asia, the best performers for the month were long/short (+3.4%) and multi-strategy (+3.2%) funds. Korea, India, Taiwan (+9%) and China led the way, while Thai and Malaysian markets continued to lag.

Funds allocating to distressed debt had a relatively flat month in November, rising 0.7%. The distressed debt market had rather slim pickings for the month barring one name that many global players seemed obsessed with – LG Phillips Displays (LGP). LGP is facing the twin problems of declining revenues (and by extension, profits) due to rapidly declining prices for its products, and the huge costs of shutting down unprofitable production facilities in Europe. As the largest remaining player in this industry, players continue to monitor LGP to determine whether LGP would gain market share and recover, or default.

Strategy	Nov 05	Oct 05	YTD 2005	2004	2003
Convertible Arbitrage	1.10%	-2.05%	1.85%	-1.79%	n/a
Distressed Debt	0.69%	-0.38%	7.14%	19.13%	24.12%
Event Driven	1.31%	-0.15%	8.07%	17.73%	9.31%
Fixed Income	0.69%	-0.07%	9.99%	14.67%	11.90%
Long/Short Equities	3.43%	-3.23%	8.15%	9.19%	37.17%
Multi Strategy	3.21%	-2.71%	6.06%	11.46%	26.85%
Relative Value	2.58%	-0.56%	14.60%	-3.48%	34.13%
Eurekahedge Asia ex-Japan Hedge Fund Index	3.07%	-2.72%	8.08%	9.89%	32.22%

Outlook

As 2005 draws to a close, prospects for 2006 look encouraging, particularly so in Asia. Japan's reflation and restructuring story remains intact, investor confidence in Indian and Korean markets over the recent months suggests a bullish short-term and China's growth is again on the acceleration path. In such an environment, Asia promises to generate healthy returns in the near term for hedge funds across strategies.

Latin America

Markets at a Glance

The MSCI EMF Latin America Index rose 7.9%. Brazil and Mexico were the leading return generators, both closing the month at over 8%. Brazilian markets rallied sharply amidst an interest rate cut and a significant improvement in the price of Brazil's international debt. However, the issue of capacity constraints has come to the fore as a result of the recent disappointing industrial production and third quarter GDP data.

Mexico's GDP, on the other hand, grew 3% year-on-year and the Central Bank continued with its gradual interest rate cuts.

Argentina underperformed in November (-0.3%) after the government ousted the respected former finance minister Lavagna in favour of a politically motivated appointment. This increased investors' caution levels over Argentina's medium-term prospects. Neither the liquidity nor the complacency of foreign inflows, seen in the last few months, could offset this.

Hedge Fund Performance

Onshore Funds

Among onshore Latin American funds, long/short equities and relative value were the most profitable strategies, posting superb returns at 3.8% and 2.7% respectively. While most Latin American funds were generally assisted by the equity rallies, Argentinean funds did not have such a bad run either because of the significant profit-taking that took place in October and insured these funds from November's negative performance.

The worst performers for the month were Brazilian funds allocating to the CTA/managed futures strategy, returning a rather poor -2% for the month. The Brazilian Central Bank, with a goal of reducing dollar-indexed domestic debt, resumed its reverse swap auctions during the month. Despite BCB becoming a net buyer, the dollar remained in a downtrend vis-à-vis the Brazilian real, partly owing to the strong performance of the Brazilian trade sector (US$4.1 billion surplus). Given the strength of the US dollar in November (for instance, against euro and yen), managed futures funds that misread this trend could have pulled the index down.

Strategy	Nov 05	Oct 05	YTD 2005	2004	2003
CTA/Managed Futures	-2.01%	4.10%	-20.84%	19.33%	4.27%
Event Driven	2.21%	0.98%	28.35%	39.54%	38.56%
Long/Short	3.83%	0.26%	22.09%	35.27%	57.29%
Macro	0.23%	1.28%	5.64%	6.63%	34.39%
Multi Strategy	2.34%	0.87%	17.92%	19.70%	23.57%
Relative Value	2.68%	-3.89%	0.86%	48.56%	54.11%
Eurekahedge Latin American Offshore Hedge Fund Index	2.34%	0.74%	16.9%	22.29%	37.10%

Offshore Funds

Among offshore funds too, long/short equities was the best performing strategy, with funds allocating to this strategy up 3.6% for the month. Investors concentrated on liquidity and good technicals, ignoring increasingly overstretched valuations. Consequently, Latin American markets posted strong results, and by extension, so did equity-focused funds such as macro and long/short funds. Macro funds returned solid gains at 2.5%, generally benefiting from the broad directional trends in November. On the other hand, event driven offshore funds had a flat month in November, returning a dismal 0.1%.

Strategy	Nov 05	Oct 05	YTD 2005	2004	2003
Event Driven	0.06%	-0.77%	17.20%	20.31%	36.13%
Long/Short	3.56%	-2.55%	16.12%	31.18%	55.83%
Macro	2.54%	-0.99%	5.07%	4.93%	9.80%
Multi Strategy	1.85%	-0.75%	13.27%	16.56%	36.48%
Eurekahedge Latin American Offshore Hedge Fund Index	2.64%	-1.71%	14.27%	21.12%	54.11%

Outlook

Latin America has enjoyed sustained investor interest in its growth potential with solid GDP growth and healthy third quarter figures (cash flows and earnings have grown by over 35% each, on average). The only probable dampers to this positive outlook are 1) extremely high valuations and 2) the upcoming spate of Latin American presidential elections – 11 elections within a span of 18 months – that will add an air of uncertainty to the region's momentum of growth and may induce volatility into the markets in the coming months.

Conclusion

On a summary note, what the month saw was a typical end-of-the-year liquidity-fuelled rally in equity markets across the board. As evident from movements in the various regional markets, equities are being continuously supported by global liquidity and economic data. The lack of aggressiveness of key central banks despite higher inflation is helping shape market expectations and risk appetites. Key emerging markets such as Brazil, Mexico, India and China remain poised for further positive returns in 2006, and all the usual arguments – steady external demand for raw materials and consumer goods; rising income levels – in support of this contention are in place.

Having said that, it remains to be seen whether the next few months will see investors riding on the momentum of this month's rally. While increased volatility may still be expected in the coming few months owing to the monetary uncertainty in Japan and the US, returns of early reporting funds to the Eurekahedge database point towards a positive month in December. Furthermore, the market correction seen in the previous month is largely perceived by the market as a "nudging ahead" of what is historically a year-end phenomenon. So we do expect the markets to remain positive in the near term.

Preliminary NAV returns for December indicate returns of around 2.1% for the Eurekahedge Hedge Fund Index and 9.9% for 2005. Please visit http://www.eurekahedge.com/indices for a daily update on all 200 Eurekahedge indices.

Footnotes

¹Spanning 2,082 funds globally and across all strategies.
²Based on 93.36% of the NAV data for November received to date (2 January 2006).
³The All Strategies Index is a separate index and derives its value not only from the actual performance of the listed strategies for the investment region but also from the strategies which are not listed (due to strict Eurekahedge indices guidelines) but having the same investment mandate.