Hedge Fund Assets Drop By $210B

Oct 17 2008 | 11:07am ET

Steep performance losses and record investor capital redemptions reduced the size of the hedge fund industry by $210 billion in the third quarter, the industry’s largest-ever quarterly decline in assets.

According to data released today by Hedge Fund Research, investors withdrew over $31 billion in the third quarter, the largest net redemption in the industry’s history. At the end of the third quarter, total industry capital stood at $1.72 trillion, down from $1.93 trillion at the end of Q2. Third-quarter withdrawals entirely offset the capital inflows into hedge funds during the first half of 2008, bringing year-to-date net capital flows to a decline of $2.5 billion.

The overall outflow in industry assets exceeds the entire amount of investor capital inflow from 2007, a record $194 billion.

Investors redeemed capital from all four primary hedge fund strategies for the quarter, with the largest outflows occurring in equity hedge and relative value arbitrage. To date, these two strategies have now experienced outflows for the year, while net flows into event-driven and macro strategies remain positive year to date. All major geographic regions experienced outflows for the quarter, with the largest coming from North American and global funds.

Funds of hedge funds also experienced performance losses and investor capital outflows in the third quarter, by 9.68% for the period and 11.82% for the year. Total capital invested in funds of funds fell by approximately $78 billion, as investors withdrew $13.3 billion from funds of funds during the quarter.

The outflow from funds of funds partially offsets the capital inflow experienced in the first half of the year, and inflows for funds of funds now total just under $10 billion for the year, while total capital invested in funds of funds stands at $747 billion.

“The current financial crisis presents many similarities to the financial crisis in 1998, certainly as it pertains to the hedge fund industry,” said Kenneth Heinz, president of HFR. “Since peaking last October, the industry has lost 11.5% (performance drawdown), which exceeds the drawdown which occurred in the crisis of 1998. With losses continuing through October, it appears that 2008 will be the worst year on record for both hedge fund performance and industry asset flows.”

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