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Hedge funds see red this year after brutal August

Date: Friday, September 9, 2011
Author: Katya Wachtel, Reuters

U.S. hedge funds in August suffered their worst month in more than a year, new industry data shows.

Volatility on Wall Street in August resulted in an average 2.32 percent decline for U.S. hedge funds, said Hedge Fund Research on Thursday. The August declines pushed the benchmark HFRI Fund Weighted Composite index into the red for the year.

It was the worst month for hedge funds since May 2010, according to HFR. Still, the hedge fund industry as a whole did better in August than the broader Standard & Poor's 500 stock index, which fell 5.7 percent.

Nearly all types of hedge funds were hurt in what appeared to be a perfect storm of economic turmoil, including the European sovereign debt crisis, a drawn out debt ceiling showdown in the United States and the downgrading of U.S. Treasury securities.

Only short-sellers, who bet that stocks will fall, and global macro funds, which bet on interest rates and currencies, emerged with gains.

August's brutal sell-off showed that some managers like John Paulson, who bet big on a swift economy recovery, were ill-prepared for the market tumble. Paulson's Advantage Plus fund is down 35 percent for the year, marking one of the most prominent declines in the $2 trillion industry.

The worst hit were so-called equity hedge and event driven strategies, which were pummeled for the fourth consecutive month, recording losses of 4.1 percent and 3.7 percent, respectively, HFR said.

T2 Partners' Whitney Tilson, whose small fund lost 13.7 percent in August, was upfront in acknowledging the pain to his investors. In a letter to investors, Tilson said, "Our portfolio got clobbered across the board."

Hedge funds are not required to announce their performance numbers publicly, so industry investors closely watch the data that firms like HFR provide.

While the bloodshed was deep industry-wide, there were some winners in August. The Renaissance Institutional Equities Fund, founded by mathematician turned hedge fund manager James Simons, was one of them. The fund gained 5.4 percent last month, pushing gains to 25.6 percent for the year, according to an investor. The Renaissance Institutional Futures Fund gained 6.6 percent in August and is up 9.16 percent for the year, the same person added.

Ken Griffin's Kensington/Wellington fund at Citadel also recorded a slight gain in August, nudging the returns for the year to 15 percent.