U.S. hedge fund losses seen adding up

Date: Tuesday, August 28, 2007
Author: Svea Herbst-Bayliss, uk.Reuters.com

BOSTON (Reuters) - For hedge funds the last weeks of summer have been anything but lazy or dull as market turbulence left many of the industry's most prominent funds nursing losses this month, investors and analysts said.

As the end of August draws near, investors and analysts are bracing for the year's first monthly loss for the U.S. hedge fund industry as a whole, likely shriveling an otherwise strong year.

"This month looks pretty grim," said Christopher Holt, managing director of Holt Capital Advisors, which helps investors put money into hedge funds.

The loosely regulated investment portfolios often promise to make money in all market conditions, through techniques like borrowing money and betting on stocks falling, strategies that are off-limits for most mutual funds.

While hedge funds were once limited to wealthy individuals, pension funds and other institutional investors have become active investors as they seek to boost their returns.

Tudor Investment Corp.'s $8.5 billion (4.2 billion pound) Raptor Fund, which concentrates on buying and selling stocks and has boasted annual double-digit returns since its launch, lost 5.5 percent through last Friday, a person familiar with the fund's numbers said. Losses at the Tudor BVI Global Fund were even wider, standing at 6 percent through August 22, the person added.

A spokesman for the funds declined to comment.

A week ago D.E. Shaw's Composite International Fund was down 7 percent through August 17. A spokesman declined to comment. Cantillon Capital Management's Pacific Fund, launched several years ago by William von Mueffling, lost 9 percent through August 17, another person familiar with the numbers said. 

Based on what hedge fund managers are telling investors and the numbers that some hedge funds have already reported to performance trackers, investors will see a lot of funds in the red this month.

"These days everyone is hearing managers complain that they are losing money on the long side and that they are losing money the short side. So the bottom line is that this is going to a pretty bad month," said one person who invests with many hedge funds but is not authorized to speak about them.

Through August 22, the average global hedge fund lost 3.73 percent, data from Hedge Fund Research Inc shows. In July the average hedge fund was flat and for the first seven months of the year it was up about 8 percent, industry trackers said.

Global macro funds that bet on interest rates, currencies and commodities were especially hard hit by unexpected movement in the Japanese yen. Hedge Fund Research data shows they were off 9.36 percent in the first three and half weeks of August.

While the turbulence began with what seemed like isolated problems for hedge funds that dealt with subprime mortgages and financial sector stocks, it soon spread to hundreds of funds that only traded in equities.

The turbulence caused investors to shun risk and flee to government debt issues, a move that often hurts equities. Many hedge funds also had to sell their most liquid holdings to cover margin calls as their lenders tightened conditions, investors said.

The moves affected even powerhouse funds like SAC Capital's multistrategy fund which was down 6 percent for the month through August 17 but was up 6 percent for the year to date through the same date, an investor said.

Citadel's Wellington fund was off 3 percent through August 22 and Lone Pine, which was about 20 percent higher during the first seven months of the year, was also off in August, a person who had seen their numbers said.

While some investors in hedge funds are confident that losses like these can be made up in the next weeks and months, they worry that some big investors, like pension funds, might review investments in the industry.

"When Goldman Sachs and Bear Stearns funds blow up, people may start stepping back," said Mike Hennessy, managing director at investment adviser Morgan Creek Capital Management.