Third quarter is worst ever for hedge fund redemptions

Investors withdrew over $31 billion in the third quarter, the largest net capital redemption in the industry’s history, according to the research organisation.

At the end of the third quarter, total industry capital stood at $1.72 trillion, down from $1.93 trillion at the end of second quarter. The third quarter withdrawals entirely offset the capital inflows into hedge funds during the first half of the year, bringing year-to-date net capital flows to a decline of $2.5 billion.

The decline in industry assets for the third quarter also exceeds the entire amount of investor capital inflow from 2007, a record $194 billion.

The broad-based HFRI Fund Weighted Composite Index fell by 8.85% in the third quarter. It has declined by over 10% since the beginning of 2008.

The figures suggest 2008 could be the first negative calendar year for hedge fund performance since 2002, when the average hedge fund declined by 1.45%.

Financial market volatility, most pronounced in September, contributed to a loss of nearly 5.5% for hedge funds in September alone, the second worst single-month performance in the history of the industry. August 1998 was the worst month on record with an 8.7% loss.

Funds of hedge funds (FoHF) also experienced performance losses and investor capital outflows in the third quarter. These fell by 9.68% for the period and 11.82% for the year.

Total capital invested in FoHF fell by around $78 billion. Investors withdrew $13.3 billion from FoHF during the quarter.

Third quarter outflows from FoHF partially offsets the capital inflow in the first half of the year. Year-to-date inflows for FoHF now total just under $10 billion. Total capital invested in FoHF stands at $747 billion. Investors redeemed capital from all four primary hedge fund strategies in the third quarter. The largest outflows occurring in equity hedge and relative value arbitrage. Inclusive of 3Q losses, These two strategies have now experienced outflows for the year, while Net flows into event driven and macro strategies remains positive year to date. All major geographic regions experienced outflows for the quarter. The largest net inflows were funds focused on North American and global exposures.

Since peaking October 2007, the hedge fund industry has lost 11.5% (performance drawdown). This exceeds the drawdown which occurred in the crisis of 1998. With losses continuing through October 2008, it appears the year will be the worst year on record for both hedge fund performance and industry asset flows, according to the research group.

Hedge Fund Research data is based on over 13,000 funds tracked historically by the company. As of the end of September 2008, the group estimates the entire industry to contain more than 10,000 funds, including over 7,400 single-manager funds.