Hedge Funds face their worst month in seven years

Hedge Funds face their worst month in seven years
By James Mackintosh
Copyright The Financial Times Limited 2007
Published: September 1 2007 03:00 | Last updated: September 1 2007 03:00


August looks to be the worst month for hedge funds in seven years and is close to being the worst since 1998 as almost all hedge strategies have failed to perform.

The average hedge fund was down 3.2 per cent with one trading day left in the month, according to Chicago-based Hedge Fund Research, after a sharp recovery from a far worse position in the past two weeks. This is the worst since November 2000, when hedge funds were knocked back 3.5 per cent in a month.

"A manager who is flat in August looks like a hero at this point," said Yannis Procopis, deputy chief investment officer at CMA, a $2.6bn (£1.3bn) fund of hedge funds.

Poor performance at hedge funds frequently leads investors to pull their money, which can prompt a spiral of decline in markets as highly geared funds are forced to sell investments to meet the redemptions. But it remains unclear how much is being withdrawn, with many investors apparently sticking with their holdings in the hope of a turnround.

Hedge funds - mainly offshore investment vehicles designed to make money whatever markets do - suffered as concerns about US subprime mortgages caused wild swings in stock markets.

But after a disastrous start to the month, when many computer-driven quantitative equity funds plummeted 30 per cent or more, the sector has staged a strong comeback, recovering sharply in the past two weeks.

Equity long-short hedge funds - the biggest sector - were hit badly in August, with many funds down 10 per cent by mid-month, along with Japan specialists and quantitative equity, known as statistical arbitrage.

"Japan seems to have been an absolute blood-bath, along with quant," said the head of one large London fund.

Also hit hard were merger arbitrage and event-driven strategies, which aim to make money by betting on takeover deals.

Those down include the biggest names in the industry, among them major funds from Goldman Sachs, Highbridge, DE Shaw, Tudor, Lansdowne, Atticus, Blackstone and Caxton. But a handful of big-name funds escaped the mess, with Brevan Howard up and some of Marshall Wace's largest funds recovering from significant losses to enter positive territory.

Hedge funds and advisers say that so far investors have not panicked, and they do not expect industry-wide redemptions.

"Some people have taken money off the table in some of the event-driven strategies, but it is only small amounts," said Sean Capstick, co-head of capital introduction for Deutsche Bank.