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Hedge Fund Industry Continues To Contract

by Phillip Morton, Investors

20 November 2008

Total assets in single manager hedge funds fell 16% in the third quarter of 2008 to USD2.497 trillion, according to the latest hedge fund asset flow report by (HFN).

Performance losses during the third quarter accounted for USD347.5bn of the reduction and investor redemptions and liquidations accounted for an additional USD128bn outflow. Investor redemptions alone accounted for an estimated USD117.3bn outflow, by far the largest on record, the report shows.

In total hedge fund assets contracted by USD475.7bn in the third quarter, the largest dollar value change, up or down, in the history of the industry, HFN said.

The fund of funds (FoFs) industry also underwent a contraction in the third quarter 2008. USD134.5bn in performance losses, USD75.7bn of investor redemptions and USD4.3bn in net liquidations resulted in total FoFs assets falling 14.9% in the quarter to an estimated USD1.224 trillion, the first ever quarterly reduction in FoFs assets on record. HFN has tracked flow data back to Q4 2003.

Corporate bond strategies had attracted a significant amount of assets in the quarters leading up to the third quarter, but total assets in these funds dropped 15.1% during the quarter to an estimated USD294.6bn. Performance losses, estimated at USD54.1bn, accounted for the majority of the asset reduction. Investor redemptions reduced assets by USD7.5bn, or 2.1%, which is relatively low compared to other strategies, according to HFN.

Long/short equity hedge fund assets fell an estimated USD147.8bn, 19.2%, to USD621.8bn. Estimated performance losses were USD94.6bn. Redemptions of USD52.2bn made this the third consecutive quarter of investor redemptions from the equity based strategy.

Emerging markets dedicated hedge fund assets fell an estimated USD84.3bn in the quarter, 26.1%, to USD239.0bn. Performance losses of USD68.7bn and redemptions of USD16.0bn were both EM quarterly records.

Distressed investing strategies saw total assets fall an estimated USD62.8bn, 22.8%, in Q3 to USD212.6bn. Performance losses caused the lion's share of the reduction, USD57.1bn. Through the first three quarters of 2008, investors have actually added an estimated USD11.0bn more than they have withdrawn to distressed investing hedge fund strategies.

Early October estimates show the HFN Hedge Fund Aggregate Average, an equal weighted benchmark of all single manager hedge funds and CTA (commodity trading advisor) and managed futures products in the database, was -3.85% in October and -12.44% year-to-date. The database consists of over 8,600 current hedge fund, fund of funds, and CTA products.

Historic losses and volatility in global markets along with government intervention in both developed and emerging markets caused hedge fund performance to vary widely in October, HFN said. Early respondents show losses were greatest in emerging markets strategies, led by funds investing in Russia and the Middle East/North Africa region, long-biased equity strategies, distressed and convertible arbitrage strategies. Aggregate performance appeared to be supported by CTA/Managed futures, short-biased and mortgage related strategies.

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