According to the latest quarterly statistical report on the industry by Chicago-based Hedge Fund Research (HFR), investors pulled out a record USD31 billion from hedge funds in the three months to the end of September. However, the overall loss for the hedge fund industry over the quarter is magnified to USD210bn once fund losses are factored into the calculations. This is more than hedge fund inflows for the whole of 2007.

According to HFR's measure, these losses and redemptions have caused total assets under management by the hedge fund sector to shrink from USD1.93 trillion to USD1.72 trillion.

Funds of hedge funds, which invest across a range of single hedge fund managers to reduce risk for their clients, have also suffered at the hands of declining investor confidence, with USD13.3bn pulled from these funds, reducing overall FoHF assets to USD78bn.

Once lauded for their fleet-of-foot ability to profit from any market, whether bear or bull, through their flexible strategies such as shorting equity markets, hedge funds, like other money managers, have been caught out by the scale of the credit crisis as one by one major banking institutions in the United States and Europe toppled and governments pumped hundreds of billions into the system to prevent a banking system collapse. However, many hedge funds have been heavily exposed to the very debt toxin that has been pervading the financial system, while the ban on uncovered short selling by many regulators, including the US Securities and Exchange Commission, and the UK's Financial Services Authority, has left many hedge funds with positions that they cannot liquidate.

The average hedge fund loss in the quarter through to the end of September was 8.85%, HFR's study shows. Losses for the year are sitting at about 18%. With optimism in short supply in the world's market places, HFR is predicting that 2008 could be the worst year for hedge fund returns on record.

Nevertheless, hedge fund returns as measured by both the Greenwich Global Hedge Fund Index ("GGHFI") and the Greenwich Composite Investable Index ("GI2") have shown that for many hedge fund investors, perhaps the situation isn't quite as catastrophic as HFR's figures suggest.

Despite posting their greatest losses since August 1998 during the month of September, these two indices significantly out-performed global equity indices during the month. The GGHFI and GI2 posted declines of -4.85% and -5.87% on the month, respectively, compared to global equity returns of -8.91% for the S&P 500, -12.08% for the MSCI World Equity Index, and -13.02% for the FTSE 100. Year-to-date, the GGHFI and the GI2 have shed -8.85% and -8.82%, respectively, against -19.29% for the S&P 500, -25.59% for the MSCI World Equity Index and -24.07% for the FTSE 100.

"It was a perfect storm for both credit/equity markets and hedge funds in September," observed Greenwich Alternative Investments CEO, Thomas Whelan. "The already deflated values of financial firms provided the perfect trap for value investors while government intervention limited the ability of hedge funds to effectively mitigate their risk," he added.

Not surprisingly, Short Selling funds bucked the general trend, advancing 9.27% on average. Meanwhile, data released by the Credit Suisse/Tremont Hedge Fund Index shows that Managed Futures funds have also managed to escape the worst of the carnage.

“September was a difficult month for hedge funds across strategies, and the Credit Suisse/Tremont Hedge Fund Index will finish down 6.55% for the month.” Oliver Schupp, President of Credit Suisse Index Co., Inc.

“Convertible Arbitrage was the worst performing sector, finishing down 12.26%, while Managed Futures was down only slightly for the month, losing 0.57%. Managed Futures continues to be the best performing sector, and is currently up 6.70% year to date," he added.