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Hedge funds turn in September to forget

Date: Friday, October 17, 2008
Author: Andrew Willis, Globe and Mail

Canadian hedge funds posted a brutal 11.2 per cent decline in September, losses that are likely to leave many investors questioning this expensive alternative asset strategy.

The latest instalment of the Scotia Capital Canadian Hedge Fund Performance shows these funds outperformed the S&P/TSX composite index last month – it was down 14.7 per cent. But mounting losses on funds sold to investors as market neutral, or absolute return, are going to translate into redemptions.

“September was an extremely challenging month for Canadian hedge fund managers who were largely unable to successfully navigate erratic price movements in stocks and falling energy prices,” said Scotia Capital's note on the sector's performance.

“Panic selloffs in an environment driven by fear and uncertainty left major equity markets significantly down at the end of September,” said the investment bank. Obviously, the market swings have become even more violent in October.

Scotia Capital's index shows 45 Canadian hedge funds were down 11.2 per cent on an asset-weighted basis and 10.2 per cent on an index-weighted basis. In other words, smaller funds did slightly better than large funds. The standard pay scheme on these funds is a 2 per cent base fee and 20 per cent performance fee, which no one likely earned in September.

Year-to-date, this index of most domestic funds is down 12.7 per cent on an asset-weighted basis. The S&P/TSX benchmark is down 15 per cent over the same period.

What's tough for investors is the lack of palatable options to equity markets. Scotia Capital's bond index is up just 1.8 per cent year-to-date and T-bills have yielded just 2.6 per cent, thin gruel for anyone living off their portfolio.