Commodity Online
CHICAGO: Steep performance losses and record investor capital redemptions reduced the size of the hedge fund industry by $210 billion in 3Q08. This represents the largest historical quarterly decline in assets, according to data released the other day by Hedge Fund Research, (HFR), a leading source of hedge fund information and performance data.
Analysis compiled using HFR Database shows investors withdrew over $31 billion in third quarter, the largest net capital redemption in the industry’s history. At the end of the third quarter, total industry capital stood at $1.72 trillion, down from $1.93 trillion at the end of second quarter..
The third quarter withdrawals entirely offset the capital inflows into hedge funds during the first half of the year, bringing year-to-date net capital flows to a decline of $2.5 billion. The decline in industry assets also exceeds the entire amount of investor capital inflow from 2007, which was a record $194 billion.
The broad-based HFRI Fund Weighted Composite Index declined by 8.85 percent in third quarter and has declined by more than 10 percent through the first three quarters of the year. These figures suggest that 2008 could be the first negative calendar year for hedge fund performance since 2002, when the average hedge fund declined by 1.45 percent.
The financial market volatility, which was most pronounced in September, contributed to a loss of nearly 5.5 percent for hedge funds in that month alone, the second worst single-month performance in the history of the industry. August 1998 remains the worst month on record, having experienced a loss of 8.7 percent.
Funds of Hedge Funds also experienced performance losses and investor capital outflows in the third quarter, with these declining by 9.68 percent for the period and 11.82 percent for the year. Total capital invested in Funds of Funds fell by approximately $78 billion as investors withdrew $13.3 billion from Funds of Funds during the quarter.
The third quarter outflow from Funds of Funds partially offsets the capital inflow experienced in the first half of the year, and year-to-date inflows for Funds of Funds now total just under $10 billion, while total capital invested in Fund of Funds stands at $747 billion.
Investors redeemed capital from all four primary hedge fund strategies for the quarter, with the largest outflows occurring in Equity Hedge and Relative Value Arbitrage. Inclusive of third quarter losses, these two strategies have now experienced outflows for the year, while net flows into Event Driven and Macro strategies remain positive year to date.
All major geographic regions experienced outflows for the quarter, with the largest of these being funds focused on North American and Global exposures.
“The current financial crisis presents many similarities to the financial crisis in 1998, certainly as it pertains to the hedge fund industry,” said Kenneth Heinz, President of Hedge Fund Research, Inc. “Since peaking last October, the industry has lost 11.5 percent (performance drawdown), which exceeds the drawdown which occurred in the crisis of 1998. With losses continuing through October, it appears that 2008 will be the worst year on record for both hedge fund performance and industry asset flows."
In recent weeks several hedge fund firms announced plans to liquidate; managers said losses were simply too big to try and make up. Earlier this week Highland Capital Management told investors that it was closing two of its five hedge funds that invested $1.5 billion in assets, Reuters said in a report.
A hedge fund is a private investment fund open to a limited range of investors which is permitted by regulators to undertake a wider range of activities than other investment funds and which pays a performance fee to its investment manager. Although each fund will have its own strategy which determines the type of investments and the methods of investment it undertakes, hedge funds as a class invest in a broad range of investments, from shares, debt and commodities to works of art.
