Hedge fund assets drop 16% in Q3

Date: Thursday, November 13, 2008
Author: James Langton, Investment Executive

Single manage funds fare worse than funds of funds.

HedgeFund.net estimates that total assets in single manager hedge funds fell 16% in the third quarter to US$2.5 trillion.

Performance losses during the quarter accounted for US$347.5 billion of the reduction and investor redemptions and liquidations contributed to an additional US$128 billion outflow. Investor redemptions alone accounted for an estimated US$117.3 billion outflow, by far the largest on record, it says.

The fund of funds industry also underwent a contraction in Q3, it says, with US$134.5 billion in performance losses, US$75.7 billion of investor redemptions and US$4.3 billion in net liquidations, which resulted in total FoFs assets falling 14.9% to an estimated US$1.224 trillion, the first quarterly reduction in FoFs assets on record.

Corporate bond strategies attracted a significant amount of assets in the quarters leading up to Q3, but total assets in these funds dropped 15.1% during the quarter to an estimated US$294.6 billion, it reports. Performance losses, estimated at US$54.1 billion, accounted for the majority of the asset reduction. Investor redemptions reduced assets US$7.5 billion, 2.1%, which is relatively low compared to other strategies.

Long/short equity hedge fund assets fell an estimated US$147.8 billion, 19.2%, to US$621.8 billion. Estimated performance losses were US$94.6 billion. Redemptions of US$52.2 billion made Q3 the third consecutive quarter of investor redemptions from the equity based strategy, it said.

Emerging markets dedicated hedge fund assets fell an estimated US$84.3 billion in Q3, 26.1%, to US$239.0 billion. Performance losses of US$68.7 billion and redemptions of US$16.0 billion were both EM quarterly records.

Also, distressed investing strategies saw total assets fall an estimated US$62.8 billion, 22.8%, in Q3 to US$212.6 billion. Performance losses caused the lion’s share of the reduction, US$57.1 billion. Through the first three quarters of 2008, investors have actually added an estimated US$11.0 billion more than they have withdrawn to distressed investing hedge fund strategies, it noted.

Early October estimates show the HFN Hedge Fund Aggregate Average, an equal weighted benchmark of all single manager hedge funds and CTA/managed futures products in the HedgeFund.net database, was -3.85% in October and -12.44% in the year to date.

“Historic losses and volatility in global markets along with government intervention in both developed and emerging markets caused hedge fund performance to vary widely in October,” it says. “Early respondents show losses were greatest in emerging markets strategies, led by funds investing in Russia and the Middle East/North Africa region, long-biased equity strategies, distressed and convertible arbitrage strategies. Aggregate performance appeared to be supported by CTA/Managed futures, short-biased and mortgage related strategies.”

“For the poorest performing strategies, October will likely end up as a record month for losses. During very difficult months, hedge fund performance tends to be reported more slowly, with better performing sectors having a greater representation. For this reason, it is expected that aggregate hedge fund performance will continue to drift lower as more funds report,” it adds.