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Hedge funds see net redemptions of USD40bn in October, says HFR

Date: Monday, November 24, 2008
Author: Hedge Fund Research

The acceleration of the global financial and economic crises in October contributed to continuing losses in the hedge fund industry, with the HFRI Fund Weighted Composite Index falling nearly 6 per cent for the month, according to Chicago-based industry data provider Hedge Fund Research.

The index has fallen more than 16 per cent over the first 10 months of 2008 and declined by more than 12 per cent since September 1, although equity market indices around the world have seen much larger declines.

Investors withdrew more than USD40bn from hedge funds in October, which, on top of USD115bn in performance-based asset losses, reduced the industry's capital base by USD155bn, according to HFR.

Other measures of the size of the hedge fund industry are significantly larger, even after the turmoil of the past three months. HFR estimated the entire industry to comprise more than 10,000 funds, including more than 7,400 single-manager funds, with assets of USD1.72trn at the end of September, but surveys of hedge fund administrators point to an industry with as many as 14,000 funds and assets of at least USD2.85trn at the end of March this year.

The firm says assets under management in the global hedge fund industry declined to USD1.56 trillion at the end of October, a level HFR last recorded at the end of 2006. Last month's losses follow a third quarter during which global hedge fund capital fell by USD210bn through a combination of negative performance and redemptions.

According to HFR, investors withdrew capital from each of the four main broad hedge fund strategies of equity hedge, event-driven, relative value and macro, each of which has now seen net redemptions for the year so far. Last month, investors withdrew almost USD11bn from macro strategies despite a year-to-date performance gain of more than 4 per cent up to the end of the month, a period during which the S&P 500 has declined more than 35 per cent.

The largest capital reductions during the month came from funds of hedge funds, from which investors withdrew more than USD22bn. Funds of hedge funds have underperformed the overall industry so far this year, with the HFRI Fund of Funds Index posting an 18.50 per cent decline, compared with 16 per cent for the HFRI Fund Weighted Composite Index.

Performance losses last month were most significant in funds focused on emerging markets, relative value arbitrage and energy and basic materials equities, HFR reports. By contrast, short selling is up more than 22 per cent for the year while macro systematic strategies, which employ quantitative trend-following programmes, gained more than 6.5 per cent in October and nearly 15 per cent so far in 2008.

Fifty-two per cent of October capital outflows were from firms with more than USD5bn in assets under management. These largest funds represent only 5.5 per cent of the number of funds in the industry but account for more than 58 per cent of all hedge fund capital.

'The performance of the hedge fund industry has declined more than 17 per cent since October 2007, making the current performance drawdown the largest in history,' says HFR president Kenneth J. Heinz.

'The industry has now registered five consecutive months of losses, another inauspicious first. Consolidation is likely to continue into 2009 as investors across all asset classes indiscriminately liquidate assets to move portfolios into cash holdings.'

HFR's data is based on more than 13,000 funds tracked historically by the firm, including more than 7,800 funds reporting to the firm as part of the HFR Database subscription product. Founded in 1993, HFR Group is a provider of hedge fund data, research, indexation and asset management products and services, including the HFRI and HFRX indices of hedge fund industry performance.