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Hedge fund assets to fall by 20% in 2009

Date: Wednesday, April 8, 2009
Author: James Langton, Investment Executive

Assets decline 9% in the first two months of the year as redemptions surge.

Hedge fund assets under management fell by nearly 30% in 2008, and could fall another 20% this year, according to a report released Tuesday.

The research, from International Financial Services London, finds that global hedge fund industry assets slipped by almost a third to US$1.5 trillion. The decline, the biggest on record, was due to a combination of negative performance, a surge in redemptions and liquidations of funds, it says.

And, it indicates that a further fall in AUM of over 20% is possible in 2009 as some hedge funds, particularly in the United States, had suspended redemptions late in 2008.

“The decline in assets during 2008 was split relatively equally between negative performance and asset outflows. On a regional level, redemptions were more responsible for a fall in assets in Europe and emerging markets, while in the U.S. and Japan, losses on investments accounted for a bigger proportion of the decline. Asia saw the highest rate of liquidations,” it reports.

On a performance basis, the average hedge fund lost 15.7% in 2008, which the IFSL says is the worst performance on record. Hedge fund losses were widespread, with nearly three-quarters of funds making losses, and 85% of funds of hedge funds losing money.

Additionally, hedge funds returned 13.2% of investors’ assets in 2008. “The surge in redemptions was due to losses, risk aversion and the reputational damage inflicted by the Madoff fraud,” it says, noting that this is only the second time over the past 20 years that the industry has suffered an annual net outflow of funds.

Moreover, the IFSL says that data for the first two months of 2009 shows that investors have continued to pull money out of hedge funds, with a further US$115 billion returned during this period.

With industry assets tumbling, the number of hedge funds fell by 10% in 2008 to around 10,000, and industry employment fell by about 6%, it adds. A further fall in employment is likely in 2009, it says.