Hedge Fund Index Revised Downward Due to Bear

Investment News Daily said that a major hedge fund index had to revise its performance results downward due to the losses reported at the failed Bear Stearns hedge funds.

Normally, this sort of event wouldn’t be noteworthy. A number of different indices measure hedge fund performance, and they report it by strategy (e.g., global macro, event driven, emerging markets, distressed securities, market neutral). And (so far) this was only one source, Credit Suisse/Tremont, and only one index, fixed income arbitrage.

But the change was dramatic. Monday, the firm reported year-to-date results for that strategy of 3.7%. Yesterday, it revised them to negative 7.5%. It’s enough to make one question whether anyone really knows what is going on with these funds.

From Investment News Daily:

The recent fall out in the market for subprime mortgages caused one prominent hedge fund index last week to revise some of its performance returns.

On Monday, the Credit Suisse/Tremont Hedge Index reported that its hedge fund index for fixed-income arbitrage was up 0.21% for June and 3.7% for the year-to-date.

On Wednesday, the index had revised those returns, telling investors that its hedge fund index for fixed-income arbitrage had fallen almost 6% in June and was down 7.5% for the year.

The index needed to be revised because Bear Stearns Cos. Inc., which in June said it was bailing out one of its struggling hedge funds that invested in bonds linked to subprime mortgages, did not report returns on time, a Credit Suisse official said.

That change spurred one adviser who specializes in alternative investments to question the opaque nature of the hedge fund industry.

“I just think it points out a risk to hedge funds we only remember when something like this happens,” said Rob Isbitts, president and chief investment officer of Emerald Asset Advisors LLC of Weston, Fla.

“And the risk is the time lag in reporting.”

The lack of transparency and liquidity in such cases is a clear reminder of the hazards in hedge funds, he said.

“This doesn’t mean that hedge funds are bad, but we tend to forget this is the one of the risk,” he said.

“It’s a special situation,” said Phillip Schenk, direct or marketing with Credit Suisse Asset Management of New York. Bear Stearns didn’t make its information available until Tuesday night, he said.

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