Despite steep losses on U.S. stock exchanges in the just-ended third quarter, the Average U.S. Hedge Fund ended the period down only ?3.6% net of fees. The Average Offshore Hedge Fund returned ?2.5% net for the quarter. Stock portfolios generally suffered much worse results as the S&P 500, Dow and NASDAQ plunged ?17.3%,          ?17.4% and ?19.8%, respectively.

July and September were very tough months on Wall Street and, as one might expect, the sell-off among stocks during those months did have an impact on hedge funds, which have more exposure to equities than to any other asset class. However, the sophisticated hedging strategies used by many hedge funds were successful in softening the market?s blow. Among the funds which have reported, about 40% posted a gain for the third quarter and almost half were positive for September. U.S. and Offshore hedge funds averaged September net returns of ?1.4% and ?1.3%, respectively.

Many investors have been turning to hedge funds over the past two years due to their reputation of preserving capital in stormy markets. So far this year, hedge funds have largely lived up to that claim, with the Average U.S. Hedge Fund having lost just ?3.6% net year to date. Non-U.S. domiciled funds are faring even better, with the Average Offshore Hedge Fund down ?1.9% net. It?s also interesting to note that, on a year-to-date basis, about one-half of hedge funds have produced positive returns. In contrast, the S&P 500 fell ?28.2% over the first nine months of the year while the Average Equity Mutual Fund lost ?25.0%.

Of the fourteen hedge fund strategies tracked by VAN, Short Selling has easily been the most successful in 2002. While most hedge funds have the ability to sell short to some extent, Short Selling strategy funds specialize in the practice, making them obvious beneficiaries in bear markets. On a global basis, these funds averaged a net gain of 5.9% in September, 14.1% in the third quarter and 33.6% for the year to date. Most strategies, however, posted a loss last quarter, with Several Strategies, Emerging Markets and Value showing the largest losses.

The third quarter also proved to be difficult for hedge funds specializing in particular industry sectors as Media/Communications funds lost ?10.5% net, Healthcare funds fell ?7.1% net, Financial Services funds lost ?2.4% net and Technology funds lost ?2.1% net.

For the third quarter of 2002, the best performing strategies were U.S. Short Selling, Offshore Short Selling and Offshore Market Timing, with net gains of 15.8%, 12.4% and 2.3%, respectively. For September, the top strategies were Offshore Short Selling and U.S. Short Selling, with net returns of 5.9% and 5.8%, respectively, followed by U.S. Market Neutral Arbitrage and Offshore Market Neutral Arbitrage, each with a net return of 0.7%.

Van Hedge Fund Advisors International, Inc.                           
e-mail: vhfai@vanhedge.com