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Hedge funds hit critical list worldwide

Date: Thursday, August 9, 2007
Author: FT.com

Hedge funds globally suffered their second-worst week in four years during the final full trading week of July as continuing concerns about the spread of US credit problems took their toll on performance.

The Hedge Fund Research index of investable hedge funds, one of the most widely followed hedge fund performance benchmarks, fell by just over 3 per cent in the week beginning Monday July 23 as global markets fluctuated wildly.

It represented the worst week of performance since the week beginning March 26 this year, when the index fell 3.4 per cent as global stock markets suffered a sudden sharp sell-off.

Jeffrey Larson, founder of Sowood Capital, one fund that collapsed due to the market turmoil, said recently that the pain inflicted during the week of July 23 led to his eventual decision to transfer his fund's credit portfolio to Chicago's Citadel Investments.

"Each day brought greater and greater losses," he said.

HFR was due to report full-year figures for its entire database of hedge fund managers in New York late on Tuesday. Investors are keenly awaiting indications of July performance from index providers and hedge fund managers, many of whom are expected to report big losses for the month.

Other recent losers include Braddock Financial, which is closing its $300m Galena fund due to losses on subprime.

The Horizon Fund was down 32.9 per cent in June and sources close to the fund suggested it may have endured more problems in July, while the Eidos Structured credit fund was down 8 per cent in June.

Kevin Harrington, director of research at Clarium Capital, a macro fund that has avoided the meltdown, said: "Some of the funds that got into trouble have long lock-ups, and it was the margin calls that triggered their crisis. Once that starts, it's a daisy chain".

Bear Stearns gave early indications of the extent of problems related to hedge fund investments in the subprime market, when it ran into problem with two of its hedge funds, which it is now liquidating. It has also suffered problems in a third hedge fund.