Hedge funds endure woeful August - HFR

Date: Monday, September 12, 2011
Author: Martin Leonard, COO Connect

Hedge funds suffered the worst monthly declines last month since May 2010 with the HFRI Fund Weighted Composite Index falling 2.3%, according to data from the Chicago-based Hedge Fund Research (HFR).

Several high profile firms have nursed significant losses during the summer as markets proved to be highly volatile. The $36 billion Paulson & Co saw its Advantage Plus Fund fall 14% in August with year-to-date (YTD) losses of 34%. JP Morgan’s long/short equity fund Highbridge Capital was 9.2% down while Owl Creek Asset Management’s $5 billion flagship fund lost 5% in mid-August.

Hedge funds have suffered amid the ongoing European sovereign debt crisis and the general economic fatigue in the US. Many are still reeling from Standard & Poor’s decision to downgrade the US’s coveted AAA credit rating to AA+ and the continuing debate surrounding the country’s debt ceiling. Furthermore, employment figures were disappointing.

Equity hedge and event driven strategies were the worst performers in August with declines of 4.1% and 3.7% respectively. This was their fourth consecutive month of negative returns – a feat not seen since the height of the financial crisis in 2008. Funds of hedge funds (FoHFs) also experienced a woeful month falling 2%.

“The volatile environment for hedge funds in August exhibited certain similarities to the financial crisis of 2008 but exposed key differences with significant implications for both investors and hedge fund managers,” said Kenneth Heinz, president of HFR.

“Similar to 2008, equity and credit sensitive strategies were the weakest area of performance while macro systematic funds were tactically positioned for the volatile environment. In contrast, however, financial markets maintained liquidity in August, with risk dynamics concentrated in developed market sovereign credit and employment, as opposed to 2008, when the overhang of excessive levels of private consumer and mortgage debt were the primary catalysts,” added Heinz.