Hedge Fund Indices Register Scope Of October Disaster

Nov 13 2008 | 12:56am ET

These days, a set of results from a hedge fund index is bleak. Three sets is a bloodbath.

The disaster facing hedge funds is all too clear when perusing the latest reports from the Hennessee Group, Greenwich Alternative Investments and Hedge Fund Research. All three indices are deep in the red through the first 10 months of the year—each is down about 15%, after shedding approximately 5% last month—and a look at their various substrategies shows that the pain inflicted by the market turmoil is wide and deep.

“Massive deleveraging resulted in significant declines across the board, resulting in the ‘worst month in history’ for most risk assets. While many managers are seeing very attractive investment opportunities, they are struggling to retain investors and their capital bases,” said Charles Gradante of Hennessee. “Thus far, we have seen more funds freeze redemptions, utilize redemption gates, reduce fees, and liquidate than in the history of the hedge fund industry.”

But Gradante points out that things could be much worse: The Standard & Poor’s 500 Index is down a catastrophic 34.02% this year. Indeed, S&P 500 shed 16.94% in October alone, more than the average hedge fund has lost all year.

“While the Hennessee Hedge Fund Index is down 15.73% this year, it has outperformed the S&P 500 on a relative basis by almost 20%” he noted.  “It has certainly been a challenging year, but hedge funds have worked to preserve capital in an extremely challenging market environment.”

Of course, outperformance is relative, and some hedge fund strategies have had years that are as bad, if not worse, than the S&P 500’s. Some specialized sector-specific strategies, such as energy and basic materials, which is down 31.47% on the year after losing 11.23% in October, according to HFR, have been especially hard-hit. Convertible arbitrage funds are an across-the-board loser, with the three indices having it down by between 21.34% and 35.18% after a double-digit decline last month. And emerging markets funds appear poised to go first-to-worst this year, down between 28.16% and 35.17%, depending on the index. Funds focused on Russia and Eastern Europe have had a particularly disastrous year, down 50.92% (down 26.42% in October), according to HFR.

Hedge funds are down across the board, according to the indices. Major strategies, such as equity market-neutral (down between 3.78% and 7.49% on the year, depending on the index), event-driven (down between 13.29% and 21.14%) and merger arbitrage (down between 0.86% and 5.37%), are in the red.

There are a few bits of good news in the mountain of ugly figures. Short-sellers, predictably, have had a fabulous year, rising between 21.18% and 25.6%, depending on the index. Directional-trading funds did better than most strategies, rising 8.22% on the year after a 4.88% October return. Futures funds are up 16.07% (up 6.61% in October), while macro funds have also enjoyed the market rollercoaster. Macro fund returns range from a loss of 4.19% to a gain of 5.55%, and were some of the month’s strongest performers. Among macro funds, systematic diversified offerings were particularly strong, adding 16.14% on the year (up 7.52% last month), according to HFR.

Funds of hedge funds are down 18.74% on the year, according to HFR, after shedding 7.27% last month.

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