The financial media has, for the last month, regularly mentioned poor performance and high redemptions at individual hedge funds, and stories that a lot of players had taken significant losses. While those reports sound entirely plausible, they are nevertheless anecdotal.
Bloomberg tells us that a hedge fund indexes, which track performance systematically, are confirming the rumor mill, namely, that the industry had a miserable September.
From Bloomberg:
Hedge funds worldwide posted record monthly losses in September as short sale bans and client redemptions amid the credit crisis hurt funds including Citadel Investment Group Inc., according to Eurekahedge Pte.
The Eurekahedge Hedge Fund Index, which tracks 2,431 funds that invest globally, declined 4.7 percent, preliminary figures from the data provider show. The drop is the biggest one-month loss since the firm began collecting data in 2000 and the index, down 7.9 percent through September, is set for its worst year on record.
“The volatility has been difficult even for seasoned veterans to manage; one day the markets plunge on apocalyptic fundamentals, and the next day they surge,” said Robert Howe, founder of Hong Kong-based hedge fund manager Geomatrix (HK) Ltd., which oversees $32 million. “As many managers just liquidate to wait out the storm, or clients do it for them, money drains out of all investment strategies.”
Hedge funds have suffered from financial market contagion triggered by the collapse of the U.S. subprime mortgage market last year, losing about $88 billion of assets on investment declines and investor withdrawals in September. That’s reduced the industry’s total size to about $1.8 trillion, according to Singapore-based Eurekahedge.
Citadel Investment’s biggest hedge fund fell as much as 30 percent this year because of losses on convertible bonds, stocks and corporate debt, two people familiar with the Chicago-based firm said earlier this month.
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Dear hedge fund fat cats in Manhattan, Greenwich, London, Chicago, etc.
You grew it. You chew it.
Lovingly, the American public.
It is becoming increasingly clear that the stock market crash is occuring primarily because of hedge fund redemptions. This ‘run on the shadow bank’ is going to drain our economy. Thus it is imperetive to stop this by the government guaranteeing deposits in such funds. This will have the additional benefit of drawing capital away from Europe (who will be reluctant to follow the same strategy on ideological grounds) thus turbo charging both our economy and currency.
Dear Hank, Please guarantee everyone’s credit card bill as well. This will help our national consumption and prevent our bellies from deflating. Anyway it would be a nice thing to do. Let future generations pay for our bills. It is small change if you look at the big picture. Kind regards, Joe the Taxpayer
Wow,2,431 hedge funds! I had no idea there were that many. No wonder it’s falling apart. How can that many funds doing essentially the same thing not eventually all do the same thing wrong and bring down the whole industry?
It’s pretty well known (at least by sensible individuals) that hedge funds on average will underperform the market (after fees).
After 5 years of outperformance, it seems likely that the next few years will take a seriously toll on hedge funds. Especially with all the litigation that will be coming.
I think it is 5,000 plus globally… Not all hedge funds have the same strategy (not including leverage, which a great majority do imploy). Its just too many of the amateur hedge funds borrowed egregiously in yen and then proceeded to all go long commodities and emerging markets without really hedging themselves. Many were just mutual funds on steroids (leverage), and when they all simultaneously stopped juicing is when the minsky moment of the paradox of deleveraging occurred. How long this negative feedback loop continues is something I cannot answer as many more dominos are getting knocked down simultaneously and tipping others to fall.
Hedge funds if done conservatively and properly definitely have a place in the investment landscape.
If these are the vehicles that trade over the counter with no controlling authority then only BIS has any clue of how many and what they are worth.
http://www.bis.org/publ/work260.htm
I dimly recall seeing a figure of 8,000 hedge funds a year or so ago, but note that that counts each fund within a fund group as a separate entity (firms like Citadel have multiple funds under their umbrella). Also note that lots of newbie funds don’t make it to the three year mark. Lots of birth and death at the low end.
they are more than 9,000.
think about this:
before there were ever hedgies, people invested their own savings, and their pension funds did that as well. mutual funds only spurred investing by less confident people. the net effect was most idle cash before was pumped into the broad market.
then hedgies appeared, mainly due to the ability of some people to outperform the herd. now they've become the herd themselves. with them or without, the money will be invested. the net difference is the 2% annual fee and the 20-40% performance fee they will loot. the effect on the broad market is draining at least 2% per year of all invested money into it by those structures.
does it really matter if your alternative investments will be a few percentage points above S&P when the gain will be offset by a loss on all your other investments?
it is time to charge carried interest at full rate and eliminate incentives for those parasites. most of them are parasites: sales people from IBs that got connected with pension fund managers and attract money so they can milk others' savings cows in echange for golf trips, jobs for the kids and other perks. this is cronyism.