Steep performance losses and record investor capital redemptions reduced the size of the hedge fund industry by USD210bn in the third quarter, the largest three-month decline in assets sin
Steep performance losses and record investor capital redemptions reduced the size of the hedge fund industry by USD210bn in the third quarter, the largest three-month decline in assets since 2005, according to Chicago-based industry data provider Hedge Fund Research, while investors’ net capital redemption of USD31bn was the largest in the industry’s history.
At the end of the September, total industry capital stood at USD1.72trn, HFR calculates, down from USD1.93trn three months earlier. The third quarter withdrawals entirely offset the capital inflows into hedge funds during the first half of the year, resulting in a net capital outflow of USD2.5bn so far in 2008. The decline in industry assets in the third quarter also exceeds the entire record USD194bn inflow of investor capital last year.
The broad-based HFRI Fund Weighted Composite Index declined by 8.85 per cent in the third quarter and by more than 10 per cent through the first nine months of the year. These figures suggest that 2008 could be the first negative calendar year for fund performance since 2002, when the average hedge fund declined by 1.45 per cent.
Financial market volatility, which was most pronounced in September, contributed to a loss of nearly 5.5 per cent for hedge funds in that month alone, the second worst single-month performance in the history of the industry after August 1998, when funds averaged a loss of 8.7 per cent.
Funds of hedge funds also experienced a 9.68 decline in capital in the third quarter and of 11.82 per cent for the year to date as a result of performance losses and investor capital outflows. Total capital invested in funds of funds fell by around USD78bn as investors withdrew USD13.3bn during the quarter. The outflow partly offsets capital inflows in the first half of the year, reducing net inflows for the year so far to USD10bn, out of total fund of funds capital of USD747bn.
Investors redeemed capital from all four primary hedge fund strategies, with the largest outflows affecting equity hedge and relative value arbitrage. These strategies have now experienced net outflows for the year, but net flows for event-driven and macro strategies remain positive for 2008. All major geographic regions experienced outflows in the third quarter, with the largest for funds focused on North American and global exposures.
‘The current financial crisis presents many similarities to that in 1998, certainly as it pertains to the hedge fund industry,’ says HFR president Kenneth Heinz. ‘Since peaking last October, the industry has lost 11.5 per cent in performance, which exceeds the drawdown in the crisis of 1998. With losses continuing through October, it appears that 2008 will be the worst year on record for both hedge fund performance and industry asset flows.’
HFR’s data is based on more than 13,000 funds tracked historically by the firm, including more than 7,800 funds reporting to the firm as part of the HFR Database subscription product. Founded in 1993, HFR Group is a provider of hedge fund data, research, indexation and asset management products and services, including the HFRI and HFRX indices of hedge fund industry performance.
