Hedge fund investors bracing for lower returns

Date: Thursday, September 13, 2007
Author: Joe Bel Bruno, Associated Press

NEW YORK -- Hedge fund investors have grown used to huge returns. No longer.

Last month's market volatility has caused the $2.4-trillion (U.S.) industry to suffer its only losses of the year. Hedge funds collectively posted declines of about 1.3 per cent in August, according to industry tracker Hedge Fund Research Inc.

The deep-pocketed investors that infuse these funds with capital are now bracing for the most disappointing progress reports seen in years, with the risk of even worse to come in weeks ahead.

"For those that suffered from declines, it is still fairly early to provide any kind of concrete results," said Joel Schwab, managing director of Channel Capital Group Inc., which tracks hedge fund performance. "The books may still be adjusted, numbers may still decline, and estimates could be revised downward."

Citigroup Inc.'s flagship Old Lane Partners LP told investors in a letter sent out on the weekend that it suffered a 5.9-per-cent decline in August. Pirate Capital, the hedge fund managed by Thomas Hudson, told its backers that assets in two of its activist funds lost almost 80 per cent of their value in the past year.

More letters are expected as hedge funds - especially those that invest heavily in illiquid or high-risk assets like mortgage-backed securities - finish tabulating results for the month.

Hedge funds, typically privately run investment vehicles that attract wealthy individuals and institutions, were squeezed as stock markets were roiled this summer. Rising delinquencies on mortgages made to people with bad credit forced two hedge funds managed by Bear Stearns to file for bankruptcy earlier this summer.

A whole slew of others reported similar distress because they could not properly value their holdings, or because investors were rushing to get their money back in fear of a market collapse.

Investors in Old Lane's funds received a letter dated Sept. 7 that outlined the performance of its $4.4-billion worth of assets. The multi-strategy fund focused on a mix of stocks, bonds and commodities.

The 5.9-per-cent drop in August still left Old Lane with a 1.9-per-cent gain for 2007. That return trails the 6.2-per-cent advance made by the industry for the year to date, according to Hedge Fund Research.

Jon Diat, a spokesman for Citigroup, would not comment about Old Lane's decline.

Meanwhile, Pirate Capital said in a recent letter that investors could not withdraw money from its two Jolly Roger Activist funds. Those investors won't get access to their investments until the holdings of the funds are sold.