Hedge Funds Off To Their Worst Performance In 20 Years

According to one index--and there are many--tracking hedge fund performance, hedge funds are off to their worst start since the Hennessee Hedge Fund Index started in 1987. Other indices show similar poor performance.

An index of hedge funds compiled by Hedge Fund Research fell 1.37% last month, leaving it down 4.83% so far this year. August was the third straight month in which declines exceeded 1%, HFR noted.

Emerging markets managers lost 5.02% on average in August, while hedge funds focused on energy and basic materials lost 2.22%, according to HFR data.

Another hedge fund index run by Greenwich Alternative Investments fell 1.18% in August, leaving it off 4.12% this year. Fewer than 40% of managers tracked by the firm made money last month.

The Hennessee Hedge Fund Index slipped 0.72% last month, leaving it down 4.09% so far in 2008. Managers tracked by Hennessee lagged benchmarks last month, with the Standard & Poor's 500 index gaining 1.22% and the Lehman Aggregate Bond Index advancing 0.95%.


The results are not surprising to me given that quite a few hedge funds are leveraged and trend followers. Given the fact that hedge funds are secretive, no one knows for sure but some say that hedge funds were heavily long commodities over the last year while short financials. Obviously this wasn't a good position to take in the last few months.

A couple of points need to be made about hedge funds. First of all, there are many different strategies being employed so different styles can produce radically different results. For instance, if I'm not mistaken, merger arbitrage is doing well this year.

Secondly, hedge funds generally promote absolute returns and that's how they often justify their high fees. So it is very important for them to post positive returns (however small) even if the broad market is negative. This is one reason hedge funds are considered to have done poorly this year even though they are beating the S&P 500. Conversely, they are not expected to beat the S&P 500 during strong bull markets. In contrast, mutual funds promise relative returns that beat the S&P 500 (or some other benchmark.) If the S&P 500 drops 15% and a mutual fund drops 10%, it would be considered a success.

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