Hedge funds hit by Bear bailout

By Laurence Fletcher

LONDON (Reuters) - Long-short equity hedge funds are set to post poor performance for March as the bailout of Bear Stearns and commodity price falls hit recently profitable trades, according to HSBC Alternative Investments.

Many hedge funds have been short the financials sector since the credit crisis began last summer and some banks started revealing large writedowns related to the subprime mortgage meltdown.

However, that short trade turned sour last week after JPMorgan (JPM.N: Quote, Profile, Research) agreed to buy troubled investment bank Bear Stearns (BSC.N: Quote, Profile, Research) and the U.S. Federal Reserve agreed to take control of a $30 billion (15 billion pound) portfolio of Bear Stearns assets.

"When we had bailout of Bear Stearns ... there was a sea change, the valuation of financial shares really rebounded quite strongly and we're still seeing that," Tim Gascoigne, global head of portfolio management at HSBC Alternative Investments, told Reuters in an interview on Thursday.

"That has affected the shorts of a lot of long-short equity managers who were short financials."

Barclays (BARC.L: Quote, Profile, Research), for example, is up 4.7 percent since Bear Stearns' bailout, while HSBC (HSBA.L: Quote, Profile, Research) is up 7.7 percent, compared with a 1.5 percent gain in the FTSE 100 .FTSE index.

Hedge funds were also hit after another bet on banks' woes -- buying credit default swaps -- became unprofitable.

The iTraxx Senior Financials index, which measures the cost of insuring debt of 25 leading European banks and insurers against default, has tumbled since the Bear Stearns rescue, with the Series 8 index falling to 95 basis points from 160 bps.