The hedge fund industry concluded the most tumultuous year in its history with investors withdrawing a record USD152bn in capital in the fourth quarter of 2008, according to industry data provider Hedge Fund Research.
The HFRI Fund Weighted Composite Index fell by 18.3 per cent during of 2008, only the second calendar-year decline since 1990, and the industry experienced six consecutive months of declines between June and November, including a concentrated, volatile two-month period in September and October in which the cumulative decline approached 13 per cent.
With performance down and volatility up, investors withdrew a record USD155bn during the year, only the second full year in which the industry experienced a net outflow of investor capital since HFR began tracking asset flows in 1990.
Last year's haemorrhaging of capital followed record inflows of USD194bn in 2007. Combined with the negative performance-based asset flow, total capital invested in the hedge fund industry declined to USD1.4trn at the end of December, down USD525bn from the peak of USD1.93trn recorded at mid-year. Investor redemptions were widespread and indiscriminate across fund strategies, regions, asset sizes and performance dynamics.
Dislocations and sustained volatility across financial markets contributed to record dispersion between individual funds and between fund strategies in last year. While the bottom 10 per cent of all funds declined by an average of 62 per cent, the top decile of hedge funds gained an average of 40 per cent.
The HFRI Equity Hedge Index fell by 26 per cent over the year, performance that spurred USD55bn in capital withdrawals from the strategy. The HFRI Macro Index gained 5 per cent for the year, but macro funds still experienced net redemptions of USD31bn. The HFRI Equity Hedge: Short Bias Index gained nearly 29 per cent and the HFRI Macro: Systematic Diversified Index was up nearly 18 per cent. Nonetheless, both of these sub-strategies experienced investor withdrawals and fund liquidations in the second half of 2008.
'Investor risk aversion remained at historically extreme levels through year-end, even as implied and realised asset volatility moderated,' says HFR president Kenneth J. Heinz. 'The hedge fund industry has returned an average of 11.1 per cent annually since 1990, and an average 15.9 per cent in the 12 months following the five largest historical declines.
'While we expect continued asset consolidation, the combination of improving credit markets combined with an unprecedented level of global financial stimulus are likely to be supportive of industry performance in 2009.'
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.