Hedge Funds Fall 3.36% In Worst Month Since October '08

Sep 9 2011 | 12:42pm ET

Hedge funds haven't seen a month like August since the bad old days of late 2008.

Last month's 3.36% drop in the Hennessee Hedge Fund Index was the benchmark's worst in almost three years. The index is down 1.8% on the year—but that number doesn't tell the whole story.

The overall index's performance "marks the wide dispersion in individual hedge fund manager returns," the Hennessee Group's Lee Hennessee warned. Hennessee co-founder Charles Gradante echoed that sentiment, calling the present time "one of the most challenging investment environments for hedge funds on record since inception of the Hennessee Hedge Fund Indices in 1987."

"Hedge funds experienced their worst loss in August since October 2008," Hennessee said. "Directional strategies, such as long/short and event-driven, were the hardest hit, while short-biased and macro fund were the best-performing strategies."

Long/short equity funds lost an average of 3.68% on the month (down 1.65% year-to-date) and arbitrage and event-driven funds 2.98% (down 0.89% YTD). But distressed and international funds really took it on the chin, with the former falling 6.01% (down 2.22% YTD) and the latter 5.97% (down 4.43% YTD).

Emerging markets funds dropped 3.3% (down 2.18% YTD), convertible arbitrage 1.95% (up 0.6% YTD) and merger arbitrage 1.77% (up 0.31%).

"August was a very challenging month for hedge funds as they were once again 'whipsawed,'" Gradante explained. "Hedge funds were forced to reduce exposure in order to limit losses as the financial markets plummeted. They then underperformed as the markets rallied back strongly into month end."

The exception to that rule was macro, which added 0.6% in August (up 0.11% YTD).

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