Hedge Funds Lost $11 Billion in February on Economy

Date: Wednesday, March 11, 2009
Author: Tomoko Yamazaki, Bloomberg

Investors pulled out a total of $11 billion from hedge funds in February as stocks worldwide tumbled amid signs a global recession is deepening.

Redemptions were about a third of the value in January, after the industry lost about $400 billion from its June peak to December through market losses and withdrawals, a preliminary Eurekahedge Pte report showed. The February figures were based on 41 percent of funds that disclosed estimates by March 10 to the Singapore-based research firm.

The Eurekahedge Hedge Fund Index tracking more than 2,000 funds worldwide declined 0.5 percent last month, bringing its year-to-date loss to 0.4 percent. February’s drop compared with a 10 percent slide in the MSCI World Index, which tracks stocks in 23 developed nations.

“It’s only natural that the redemptions are easing after what we saw last year,” said James Fiorillo, managing principal at Tokyo-based investment advisory firm Ottoman Capital Japan. “The fact of the matter is hedge funds have taken a lot of risk off the table now, and that’s why they are slowly starting to outperform.”

The hedge-fund industry shrank more than 20 percent to $1.5 trillion at the end of December from a peak of $1.9 trillion in 2008 as the credit crisis crippled returns, prompting investors to withdraw funds. The global hedge-fund index slid 12 percent last year, the most since Eurekahedge first published the figures in 2000.

The global economy is likely to shrink for the first time since World War II, and trade will decline by the most in 80 years, the World Bank said in a March 8 report. Its assessment is more pessimistic than an International Monetary Fund report in January predicting 0.5 percent global growth this year.

Arbitrage Strategies

By region, the Eurekahedge Latin American Hedge Fund Index was the best performer in February, gaining 0.7 percent in part because local currencies weakened against the dollar, Eurekahedge said. A measure tracking Japan-focused funds lost 2.1 percent, the biggest drop, as economic data signaled a deepening recession in the world’s second-largest economy.

The Eurekahedge North American Index declined 0.9 percent, while measures tracking Asian and European funds fell 0.7 percent each because of slumping stock prices.

Four of nine measures tracking different hedge-fund strategies gained in February. Managers that used so-called arbitrage had the biggest advance, a 1 percent gain, on further tightening of convertible arbitrage spreads, the report said.

So-called macro funds that wager on trends in stocks, bonds and currencies worldwide, and multistrategy managers, who trade everything from equities to commodities, gained 0.8 percent and 0.5 percent respectively, by selling stocks and betting on currencies and commodities, the report said.

Fixed Income Gains

Managers investing in fixed income gained 0.7 percent as Treasuries rose in the second half of the month on signs of increased demand for government-backed debt.

Those employing relative value methods that take advantage of price or spread differences fell 1.7 percent, the worst performance, while hedge funds investing in distressed debt fell 1.1 percent, and so-called long-short equity funds lost 1.2 percent.

Eurekahedge plans to release a full report on March 17. 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.

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