August is another cruel month for hedge funds

Date: Thursday, September 9, 2010
Author: Svea Herbst-Bayliss and Emily Chasan, Reuters

* Average hedge fund down 0.55 percent-survey

* Stock market decline hurts, gold bets do well

* Macro, relative value strategies show strength (Updates with Hedge Fund Research numbers)

Most hedge funds lost money again in August as hundreds of managers, including some of the industry's best-known names, stumbled when stock markets swooned anew.

Funds, on average, lost 0.55 percent last month after gaining 1.9 percent in July, according to data released on Wednesday by New York consulting firm Hennessee Group. Hedge funds lost 1.29 percent in June and fell 3.21 percent in May, reported Hennessee, one of a handful of groups that track performance and asset flows in the secretive $1.5 trillion industry.

Hedge funds again outperformed the broader market during the month, leaving their wealthy investors with gains for the year as stock indices nurse losses, but the new numbers still cast a pall over the industry.

John Paulson, who earned some $15 billion with a bet that the U.S. housing market would crumble in 2007, told investors that his flagship Advantage Plus fund fell 4.3 percent last month, leaving it down 11 percent for the year, said people who invest with him. [ID:nN07247495]

He bet that the economy would rebound strongly, but fresh worries that the recovery may be tepid, coupled with persistent fears about Europe's debt crisis, hurt him and many others.

"Managers remain cautious given the global economic uncertainty, though the consensus is that we will likely avoid a double-dip recession," said Charles Gradante, co-founder of Hennessee Group.

The numbers are being released at a time when many pension funds are sitting on piles of cash that some expect to invest with hedge funds to boost returns.

The Hedge Fund Research Inc fund weighted composite index, which also tracks hedge fund performance, was up 0.38 percent for August, boosted by strong returns from funds with macro and relative value investing strategies.

Some managers who remembered May's tumult played it safe and cut risky bets to protect capital when stocks declined sharply in the month, leaving them with better returns. The benchmark Standard & Poor's 500 index .SPX fell 4.7 percent in August.

Kenneth Griffin's flagship funds at Citadel inched up 0.75 percent during August to be up 1.78 percent for the year, a person invested with the fund said.

Steven Cohen's SAC Capital Advisors, one of the world's biggest hedge funds with $12 billion of assets, gained 1 percent in August after a 3.7 percent gain in July. For the year, the fund is up 6 percent.

As of mid-August, the most recent date for which data is available, Phil Falcone's flagship fund at Harbinger was down 14 percent for the year after falling 2.3 percent in the first half of the month.

However, some bets on broad macro investing strategies, distressed situations, bonds and gold have been paying off for hedge fund managers.

According to Hedge Fund Research, macro funds rose 2.16 percent in August and short bias funds were up 3 percent, while fixed income funds were also strong performers in August and are now up about 9.9 percent for the year. Equity hedging was among the poorest performing strategies in the month, while event driven funds were nearly flat in August, the firm said.

Paul Singer's Elliott Management Corp, which specializes in distressed investing, inched up 0.80 percent last month to be up 5.69 percent for the year.

Big bets on gold also performed well for managers like Paulson and Greenlight Capital's David Einhorn, as their gold-heavy funds saw strong returns in August as investors' fled to safety in the yellow metal.

Paulson's gold fund was up 8.96 percent in August, while Einhorn's fund returned 4.1 percent net of all fees and expenses in August.