Hedge Funds Continue to Take It on the Chin

While there are no doubt some hedge funds that have managed to navigate the minefield of turbulent markets successfully, the sudden, sometimes violent reversal of trends and breakdown of correlations had made the hedge fund operator’s life particularly difficult.

The UK’s Times (and remember London is an even bigger hedge fund center than the New York metro area) describes how even some well established managers had taken body blows, and the industry as a whole isn’t faring too well, return-wise, either.

What surprises me is that faith in this investment approach (and more important, its fee structure) seems undimmed. Generating outsized returns involves assuming more risk than, say, a simple asset allocation approach among various asset classes using index funds. But in this environment of sometimes vanishing liquidity and extreme market moves, a focus on shedding risk and preserving capital would seem to be in order.

From the Times:

The hedge fund group that took a huge bet on Northern Rock as it was imploding last autumn has reportedly lost 85 per cent of its investors’ money…

SRM, the Monaco-based group that raised $3billion from investors in September 2006, is down by 85 per cent….Tight lock-up terms prevent investors from withdrawing their money.

SRM, which was founded by Jon Wood, the former UBS investment star, is also thought to have been burnt by disappointing investments in Countrywide Financial, the American mortgage group; Bear Stearns, the investment bank rescued by JP Morgan; and Cheniere Energy, a struggling Houston-based energy company.

The news from SRM…..comes as many rival hedge funds post losses after being wrongfooted by the sudden change in sentiment over energy prices, financial stocks and the dollar.

Paragon Global Opportunities Fund, which is run Polar Capital, the London-based hedge funds group, was down 12.41 per cent in July to $897.2million.

The United States-based Pequot Global Fund is believed to have been badly hit, with one expert claiming that the fund suffered a “significant double-digit” percentage loss in July, which Pequot refused to comment on.

Another big loser is Ospraie Management, which is 20 per cent owned by Lehman Brothers. Reports suggest that it has had $1billion, or 20 per cent, knocked off the value of its Ospraie Fund this year.

For months hedge funds made money positioning themselves for energy prices and mining stocks to rise and financials to fall. But that trend reversed in July. Similarly, the US dollar regained investor popularity two weeks ago, badly burning anyone positioned for it to remain weak….

Christopher Fawcett, the head of Fauchier Partners, a London-based hedge funds investment group, said: “There was a tendency for funds that did well in June to do badly in July.” ….

Hedge fund returns sank by 2.82 per cent in July, according to the HFRX index of hedge fund returns, leaving year-to-date returns at minus 3.83 per cent, a poor performance by the standard of recent years. So far in August, returns are down by 1.59 per cent.

The article pointed out that merger arb and specialized short selling funds are having a banner year.

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  1. Anonymous

    a focus on shedding risk and preserving capital would seem to be in order.

    But the only possible way of generating high returns (and justifying their high fees) is to take large risks.

    Or should I say- taking large risks with their investors’ capital.

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