Hedge Funds Lost $100 Billion on Investor Withdrawals

Date: Thursday, November 13, 2008
Author: Tomoko Yamazaki

The global hedge fund industry lost $100 billion of assets in October, according to an estimate from Eurekahedge Pte, as firms including Sparx Group Co. and Man Group Plc were hammered by investor redemptions.

Funds fell an average 3.3 percent, based on preliminary figures from the Singapore-based data provider, as measured by the Eurekahedge Hedge Fund Index, which tracks the performance of more than 2,000 funds that invest globally. That compares with a 19 percent slide in the MSCI World Index last month.

The biggest market losses since the Great Depression and investor withdrawals hurt the $1.7 trillion hedge funds industry that manages largely unregulated pools of capital. The index of global funds has lost 11 percent this year, set for the worst performance since 2000 when Eurekahedge began tracking the data.

``This wave of redemptions in the hedge fund industry is going to last for at least another six months,'' said Toyomi Kusano, president of Kusano Global Frontier, a hedge fund research firm in Tokyo. ``There are some funds that halted withdrawals, but those funds would eventually have to defreeze, and that means another wave of redemptions.''

Earlier this week, Sparx, Asia's biggest hedge-fund manager with $8.5 billion in assets, posted a first-half loss on redemptions and falling stock prices. Its assets under management on a preliminary basis were 839.1 billion yen ($8.8 billion) as of Oct. 31, compared with a peak of 2 trillion yen in August 2006.

Shrinking Industry

London-based Man Group, the largest publicly traded hedge- fund manager, reported assets under management, which stood at $70.3 billion as of Sept. 30, fell to $61 billion at the beginning of November, the least since March 2007.

``As both hedge fund managers and fund of funds scramble to meet client redemptions, one thing is clear: the industry is going to shrink substantially over the coming months, perhaps as much as 50 percent in terms of both assets under management and number of funds,'' said Kostas Iordanidis, head of hedge funds at Geneva-based Unigestion Holding SA, which invests $3.2 billion in hedge funds worldwide.

Assets in Singapore-based Tantallon Capital's flagship Tantallon Fund shrank to $284 million at the end of October, according to data compiled by Bloomberg. The fund, managed by Nicholas Harbinson, a Tantallon co-founder and former Merrill Lynch & Co. head of sales, stood at $877 million at the end of August, from as much as $1.5 billion at the start of the year.

Outperforming MSCI World

Still, hedge funds have outperformed relative to the MSCI World Index that has lost 46 percent this year. In October, managers who trade futures, or CTAs, and those who invest in Japan helped offset declines, Eurekahedge said.

In terms of regional mandates, the Eurekahedge Japan Hedge Fund Index was the best performer, declining 0.8 percent last month, even as the benchmark Topix index slid 20 percent, the firm said. Trades that involved selling regional stocks and took advantage of currency moves helped stem losses, Eurekahedge said. The yen strengthened more than 7 percent against the dollar in October, the biggest gain since October 1998.

Among Japan funds, the 2.7 billion yen Sparx Japan Stocks Long Short Fund, also known as ``Best Alpha,'' declined 2.2 percent in October, according to monthly data posted on the company's Web site.

Myojo

The Myojo Japan Long Short Fund, run by Myojo Asset Management Japan Co., gained 4.3 percent in October on U.S. dollar-basis, according to letter sent to investors. The gain cut its year-to-date loss to 8.7 percent.

The Eurekahedge Asian Hedge Fund Index lost 4.3 percent. Singapore-based Tantallon's long-short fund, which seeks to profit from both gains and declines in stock prices, fell 28.6 percent this year through October. It was up 0.59 percent last month, Bloomberg data show.

``Although we are seeing and we will see attrition amongst Asian funds, it is unlikely to be as bad as the more developed markets,'' said Peter Douglas, principal of Singapore-based hedge-fund consulting firm GFIA Pte, citing the cost of running a hedge fund in the region.

U.S. hedge-fund managers may lose 15 percent of assets to withdrawals by year-end while their European rivals shed as much as 25 percent, Huw van Steenis, a Morgan Stanley analyst in London, wrote last month in a report to clients. Combined with investment losses, industry assets may shrink to $1.3 trillion, a 32 percent drop from the peak in June.

Strategy

The Eurekahedge North American Hedge Fund Index fell 4 percent, the firm said, while the index tracking Eastern Europe and Russia was the worst performer with a slide of 16 percent. The Eurekahedge European Hedge Fund Index slid 6.8 percent, while the measure tracking Latin American funds declined 4 percent, the data provider said.

By strategy, CTA funds outperformed, with average gains of 6.2 percent as managers exploited directional trends in the commodity and currency markets, the firm said. Similar trades also helped boost the performance of so-called macro-fund managers, who wager on trends in stocks, bonds and currencies worldwide, Eurekahedge said.

Among macro funds, Astmax Commodity Global Macro Fund, run by former Sumitomo Corp. copper trader Tetsu Emori, rose 2.6 percent last month. The 1.4 billion yen fund takes long and short positions in global commodity markets.

The preliminary figures were based on 41.5 percent of the funds reporting their October 2008 returns as of Nov. 12, Eurekahedge said. For CTA managers, the performance figures were based on 60 percent of the funds reporting, it said. The firm plans to release final figures next week.

To contact the reporter on this story: Tomoko Yamazaki in Tokyo at tyamazaki@bloomberg.net