Hedge Funds Got Shellacked Again in October

September was a world-class bad month in Hedgistan, and it looks as if October has been no kinder.

With continued losses at many funds and investors increasingly leery of risk, the thinning of this herd will continue.

From Bloomberg:

Hedge funds capped their worst two months in at least eight years in October, as global declines in stocks and commodity prices curbed returns and investor withdrawals cut assets, according to Eurekahedge Pte.

The Eurekahedge Hedge Fund Index, tracking more than 2,000 funds that invest globally, dropped 4.5 percent last month after falling 5 percent in September, the Singapore-based data provider said. October’s drop, based on 71 percent of constituent funds reporting as of today, pushed the index down 12 percent on the year, the worst since Eurekahedge began publishing data in 2000.

Investors withdrew a net total of $62.7 billion from hedge funds last month, according to Eurekahedge, shrinking the industry by $110 billion to $1.65 trillion of assets as markets tumbled amid a global recession. Assets may fall to about $1 trillion by the middle of next year, Citigroup Inc. said in a report this week.

“The industry will probably face more redemptions for a while,” said Akihiro Nishi, executive director at Tokyo-based Mitsubishi Asset Brains Co.’s investment advisory division. “The decline is a reflection that a majority of hedge funds seem to be taking risks betting more on beta,” a gauge of a fund’s risk that measures the volatility of its past returns in relation to the returns of the benchmark…

About 350 hedge funds shut down in the first half of this year, up 16 percent from 303 a year earlier, according to Hedge Fund Research Inc. An estimated 700 may go out of business by the end of the year, according to the Chicago-based firm.

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  1. alexblack

    To all the hedge fund workers, typing up their resumes: Lots of new jobs will be opening up for government employees in the new Administration. Be sure to include the words, “Am very respectful of authority figures.” They look for that sort of thing.

    Every laid asphalt? Include that too.

  2. FairEconomist

    All things considered, down 12% isn’t bad. Most diversified portfolios in stocks/bonds/real estate would be worse.

  3. Anonymous

    All things considered, down 12% isn’t bad. Most diversified portfolios in stocks/bonds/real estate would be worse.

    It’s not asset-weighted (see below). Also how are closed funds accounted for?

    The monthly index values are the respective mathematical means (average) of the monthly returns of all hedge fund constituents in the index at that time. Unlike other indices they are not asset weighted (see relevant paragraph below) or the median return.

  4. Jason

    The UAW needs a little tough love. It derailed the Cerberus deal at Delphi. Today GM suffers a loss of about $2,000 per vehicle sold. On the other hand Toyota whose employees are not part of the UAW earns a profit of about $1,200 per vehicle sold. If GM was able to operate with labor prices near Toyota’s it would have pocketed an additional $29,715,200,000.

    GM bailout nonsense

  5. Anonymous

    To me, hedge fund performance looks to be outstanding — down 2.69% in October.

    Assets as of 9/30/2008: $1650 billion plus $110 billion = $1760 billion

    Portfolio losses: $110 billion minus $62.7 billion = $47.3 billion

    Percentage loss: $47.3 divided by $1760 = 2.69%

    Hedge fund investors pulled 3.6% out of the hedge funds — probably in particularly risky funds — so what’s the big deal?

    Not to do a Emily Litella Redux, but what’s all this I hear about hedge funds getting “Shellacked”?

  6. Yves Smith

    I’m no hedge fund manager, and I am up for the year, more than if I had been in cash. So I don’t see any excuse for this performance.

  7. Francois

    I’m no hedge fund manager either, but having seen Roubini being on the target for the last year, my strategy was simplicity itself:

    1)Buy some LEAPS puts on liquid underlying stocks.
    2) Get everything 401k related into money markets (These asshats do not allow you to be in cash — no fees for them there right?)

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