Adviser to hedge fund investors Hennessee Group has estimated that hedge fund industry assets decreased by USD782bn in 2008 to USD1.21trn, a 39 per cent decline that leaves industry assets at their lowest level since the beginning of 2006.
According to Hennessee, preliminary results indicate that the industry experienced net redemption outflows of 20 per cent of assets last year or USD399bn, the largest outflow of assets in the hedge fund history and a dramatic reversal from inflows amounting to 18 per cent of assets in 2007, amounting to USD278bn.
The remaining USD382bn reduction in assets was the result of negative performance, the worst since 1987, as the Hennessee Hedge Fund Index declined by 19.2 per cent in 2008. Hennessee's figures do not include assets invested in fund of hedge funds.
'Last year was the worst for hedge funds in both redemptions and performance since Hennessee Group Research began recording performance and assets in 1987,' says the firm's co-founder Charles Gradante (photo).
'In addition, a number of high profile funds liquidated or froze redemptions, which was a tactic historically employed by hedge funds with smaller capital bases. Compounding the matter further, the industry was hit with its largest Ponzi scheme in history.'
According to Gradante, the past year's experience has encouraged Hennessee Groupin its efforts to persuade the industry to eliminate the expression 'absolute return' from its vocabulary.
'Hennessee Research continues to believe strongly that the term 'absolute return' is misleading,' he says. 'Hedge funds are relative return vehicles to equity and bond markets but substantially less relative due to hedging and arbitration. As we have seen, returns can be negative, which is not the case in the so-called absolute return world.'
But Lee Hennessee, the firm's co-founder, adds: 'Despite the challenges in 2008, hedge funds still managed to outperform their traditional counterparts by a wide margin. While the industry is certainly smaller and has additional challenges ahead, we believe it will come out of this stronger and should remain a top priority among investment committees in 2009.'
As of the beginning of this year, Hennessee Group Research says, fund of hedge funds were the largest single source of capital for hedge funds at 32 per cent of the total. Of direct investors in hedge funds, individuals and family offices accounted for 30 per cent, pension schemes 15 per cent, endowments and foundations 12 per cent and corporations 11 per cent.
Total assets for arbitrage and event-driven funds declined by some 43 per cent in 2008 as the Hennessee Arbitrage/Event Driven Index fell by 18.6 per cent for the year. Arbitrage strategies were greatly affected by the massive deleveraging and volatility in the credit markets, and redemptions would have probably been greater had many funds not instituted gates.
Total assets for long/short equity funds decreased by some 36 per cent , last year, when the Hennessee Long/Short Equity Index was down 18.3 per cent. Long/short equity funds were not immune to the massive deleveraging and suffered elevated levels of redemptions.
In addition, the liquidity profile of most long/short equity funds exacerbated redemption requests, even for strong relative performers. Investors in need of liquidity sought capital from their long/short equity investments as their allocations to multi-arbitrage and other potentially illiquid strategies were tied up due to gates or creation of side-pockets.
Total assets for global macro funds declined by 40 per cent as the Hennessee Global/Macro Index fell 20.2 per cent over the year. Global macro funds with exposure to international markets, particularly emerging markets, suffered extreme sell-offs and endured the highest level of redemptions within this category.