Hedge Funds Set For Worst Month In A Decade

by Phillip Morton, Investors Offshore.com

29 January 2008

Reports have suggested that the global hedge fund industry may be heading for its worst monthly performance in almost ten years, as fund managers struggle to navigate their way through the turbulent stock markets of 2008.

According to data complied by Chicago-based Hedge Fund Research (HFR), which produces an index of hedge fund performance across a number of strategies, global hedge fund returns fell by 3.1% in the month to last Thursday. If there is no improvement in returns by the end of January, then this would represent the worst monthly performance in the global hedge fund industry since 1998, when the Russian credit default sparked the collapse of the Long Term Capital Management fund.

A number of prominent hedge funds based in the US and the UK that turned in healthy returns in 2007 are said to be nursing losses for the month of between 5% and 10%, with funds focusing on the US equity markets having a particularly hard time. Funds specialising in international stocks, as well as arbitrage strategies, have also taken big hits, Reuters reported recently, citing data from Hennessee, another hedge fund industry returns tracker.

It is not doom and gloom for all hedge fund investors, however, and many managers have been able to use the flexibility of hedge funds to profit from the current market volatility. Those with money in funds dedicated to short equity strategies - funds that have bet on the stock markets falling - for example could see substantial returns in January.

However, with the economic outlook so uncertain in the US, and with the credit crunch continuing to work its way through global markets, many are predicting a rough ride for investors in the months ahead, with less agile hedge funds expected to fall by the wayside as a result.

As one London prime broker told the UK's Times newspaper: “The next few months will sort the men from the boys."

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