Australian Hedge Funds Hammered In 2008

Hedge Funds from Australia have seen a record decline or loss of 18 per cent in 2008, as the credit crisis intensified into a full blown panic last year, which resulted in equity markets globally selling off by as much as 50 per cent. Hedge fund managers were hit with the vicious circle of declining market valuations causing redemptions, which in turned fuelled broker margin calls and further declines in market valuations as managers liquidated positions to meet margin requirements.

Australian Fund Monitors which runs the AFM Hedge Fund Index, an index that tracks the performance of 214 hedge funds run from Australia, did not decline as sharply as the ASX 200 in 2008. The Benchmark Australian equity index fell sharply, by 41 per cent in 2008.

Hedge fund assets under management fell by a fifth globally to US$1.5 trillion according to data from Eurekahedge an industry analyst. Nobody has been immune to the market correction with marquee names such as Citadel and SAC Capital seeing marked declines in assets under management as investors redeem their funds, and indeed even the value of the assets which remain managed by the fund houses fall.

"Absolute and hedge funds were not immune from the continuing world market chaos," said Chris Gosselin, chief executive officer of Australian Fund Monitors in Sydney. "This is the worst market environment we've seen in our lifetimes and probably the worst since 1929. Only time and government intervention will tell if we meet or surpass that."

Restrictions placed by financial regulators which have imposed temporary bans on short sales of banking equities in the aftermath of Lehman Brothers collapse has hindered the ability of hedge funds to mitigate their exposure or profit from price declines.

Short selling is when market participants borrow shares they do not own, and sell them on the open market, in the belief that that market prices will decline, allowing them to buy back those shares at a lower price, returning them to the lender, paying a fee for the loan of those shares, and then pocketing the remaining difference.

Naturally a strategy of shorting financial stocks globally for most of 2008 and in particular since September last year would have yielded a tremendous pay off had it been allowed. Regulators have imposed temporary bans on the practice arguing that such tactics add to the panic and begin self fulfilling price declines.

2008 saw a halving in the value of equity markets worldwide to about $30 trillion in 2008, pushing governments around the globe including Australia, the U.S., Britain and Japan to restrict short-selling.

"Undoubtedly, one of the most dramatic issues facing the industry during the year over and above the unprecedented volatility was the short-selling ban that was implemented pretty much around the globe at the height of the market chaos in September. What was frustrating was the level of criticism of short-selling as a scapegoat for poor management decisions in the banking and corporate sector." AFM Said in its report.

By strategy, hedge funds investing in real estate were the worst performers, sliding by an average of 53 percent, followed by so-called equity 130/30 funds that use the long-short equity strategy, which fell 42 percent, in line with equity market globally.

Contrastingly and not that surprisingly, managers who took advantage of the volatility in financial markets, and those investing in commodities and managed futures, were the top three performers in 2008, gaining 14 percent, 11 percent and 7.9 percent respectively.

The best single manager was BlackRock Asset Allocation Alpha Fund, a global macro fund that wagers on trends in stocks, bonds and currencies worldwide, which gained 41 percent. The second- best performer was Select Futures, a managed futures fund, which surged 33 percent.

Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall. The differ markedly from most investment funds which tend to be Long Only, or can only really speculate that the price of certain assets will rise over time, and do not have mandates to run short positions.