In Depth

A September To Remember For Hedge Funds

Oct 9 2008 | 8:45am ET

It has been 10 years since the hedge fund industry was rocked like it was last month, and managers of all sizes took it on the chin. However, not all strategies were in the red.

The Hennessee Hedge Fund Index declined 6.24% in September (-10.28% YTD) and the Barclay Hedge Fund Index dropped 5.94% (-11.33% YTD). Both Charles Gradante, co-founder of Hennessee Group, and Sol Waksman, founder of BarclayHedge, agreed that September was the worst month for hedge funds since 1998.

“Ten years ago, Russia defaulted on its bonds, LTCM had to be bailed out, hedge funds were forced to delever by their prime brokers, emerging markets were in a tailspin, and the market for mortgage-backed securities had seized up,” said Waksman. “As Yogi Berra reportedly once said, ‘It’s like déjà vu all over again.’”

Last month, some of the bigger names in the hedge fund industry fell prey to wicked market conditions exacerbated by a mountain of bad news in the financial sector, equity market decline and the widening of credit spreads. Philip Falcone’s $1.8 billion Harbinger Capital Partners Fund I, a distressed fixed-income offering, and his $1 billion Harbinger Capital Partners Special Situations Fund last month dropped 16.13% and 28.6%, respectively, according to data obtained by FINalternatives. Year-to-date, the funds are both down 3.73% and 21.24%, respectively. The firm declined to comment on its drawdowns.

Elsewhere, the $1.2 billion Libra Fund, a long/short offering, lost 8.57% last month (-1.07% YTD) and Wexford Capital’s $1.1 billion Spectrum Fund, a multi-strategy vehicle, lost 8.65% last month and is down 9.98% through September.

But it wasn’t all bad news for hedge funds. In contrast to declines in most hedge fund strategies, the Barclay Equity Short Bias Index jumped 7.94% in September. Equity short bias traders have gained 23.42% in 2008.

Most notably, Palm City Florida-based Pere Trading Group, a $30 million fund that trades the E-mini S&P 500 futures, was up a whopping 99.87% last month, bumping its gains to 336.7% YTD. Founder David Pere declined to comment on the fund’s performance.

Also, Palo Alto, Calif.-based Connective Capital Management’s Connective Capital II QP, a $27 million short-biased offering that invests in alternative energy and technology companies, gained 21.11% last month and is up 48.53% YTD.

Connective’s portfolio manager Robert Romero said while the fund’s numbers were very “exciting” last month, October seems to be shaping up to be an even better month. “We’ve been short companies that are very levered to global growth and very speculative in certain areas,” said Romero. “Solar energy companies are currently challenged to be profitable where discretionary cap ex is constrained. We also focus on the telecom space where there is a lot of debt and leverage.”

Romero said that if market conditions warrant, the firm will launch an offshore version of the fund within the next few months.


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