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Market turbulence hits UK funds of hedge funds in third quarter, says BNY Mellon

UK pooled funds of hedge funds failed to achieve positive returns during the third quarter of this year, recording a median loss of 9.7 per cent, according to Bank of New York Mellon's asset servicing business.

The decline, which follows a positive return of 2.4 per cent in the second quarter, is the worst since Mellon Financial started to measure pooled fund of hedge funds performance in 2003 (the previous worst quarterly performance was a fall of 4.0 per cent in the first quarter of 2008).

Funds of hedge funds were outperformed by various other pooled fund sectors during the third quarter of 2008 such as bonds, property and cash, according to BNY Mellon, although they outperformed many equity fund sectors including UK equity (down 13.0 per cent), emerging market equity (down 20.3 per cent), Pacific basin ex-Japan equity (down 16.3 per cent) and European ex-UK equity (down 13.0 per cent).

Results were also negative over the 12 months to the end of September with funds of hedge funds losing 8.8 per cent, although they did outperform UK and overseas equity funds, which lost 22.4 per cent and 17.7 per cent respectively, as well as property pooled funds (down 17.3 per cent).

Stronger results in earlier periods meant that funds of hedge funds did record small medium-term gains, averaging 3.1 per cent annually over three years to September 30, 1.9 per cent a year better than overseas equity funds and 3.7 per cent better than UK equity funds. In addition, the annualised volatility of fund of funds' quarterly returns was 7.2 per cent, compared with 12.5 per cent for UK equity funds and 11.2 per cent for overseas equity funds.

Funds of hedge funds also outperformed property and UK bond funds, which averaged annual returns of 1.3 and 0.7 per cent respectively, but lagged cash (5.0 per cent) and international bonds (4.4 per cent).

'Given the extraordinary market turbulence, it is not that surprising that pooled funds of hedge funds suffered in these volatile conditions and on average produced negative returns in all three months of the past quarter,' says Alan Wilcock, performance and risk analytics manager for BNY Mellon's asset servicing business. 'Along with other asset classes, funds of hedge funds have not come away unscathed from recent events in the marketplace.'

BNY Mellon's figures are derived from a universe of 16 multistrategy funds of hedge funds with more than EUR7.8bn in assets. At the end of September, the average fund covered by the survey held 44.4 per cent of its assets in directional strategies, 13.4 per cent in event-driven strategies, 16.6 per cent in non-directional strategies and 25.6 per cent in other strategies and cash.

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