Hedge fund global AUM declines to $1.56trn

Date: Friday, January 16, 2009
Author: ICFA magazine.com

Investors withdrew over $40bn from hedge funds in October 2008. This, in addition to $115bn in performance-based asset losses, reduced the industry capital base by $155bn, according to figures from Hedge Fund Research.

Assets under management in the global hedge fund industry declined to $1.56trn at the end of October 2008, a level last seen at the end of the fourth quarter 2006.

October losses follow a challenging third quarter during which global hedge fund capital fell by $210bn.

Investors withdrew capital broadly across equity hedge, event driven, relative value and macro strategies. Each of these four main hedge fund strategies has now experienced net investor withdrawals for 2008.

In October 2008 investors withdrew almost $11bn from macro strategies despite a performance gain of over 4% year-to-date through the end of October. The S&P 500 over 35% over the same period.

The largest capital reductions during October came from funds of hedge funds (FoHFs), from which investors withdrew over $22bn. FoHFs have underperformed the overall industry in 2008.

Performance losses were most significant in funds focused on emerging markets, relative value arbitrage and energy/basic materials equities.

Short selling posted a strong gain of over 22% for 2008. Macro systematic strategies, using quantitative trend following programmes, gained over 6.5% in October 2008 and nearly 15% year to date.

In October 2008, 52% capital outflows were from companies with more than $5bn under management. These largest funds represent only 5.5% of the number of funds in the industry but control over 58% of all hedge fund capital.

Performance of the hedge fund industry has declined over 17% since October 2007, making the current performance drawdown the largest in history. The industry registered five consecutive months of losses in 2008.

Consolidation is likely to continue in 2009 as investors across all asset classes indiscriminately liquidate assets to move portfolios into cash holdings, concluded the research company.