Investors Yank $40B From Hedge Funds

Nov 21 2008 | 1:06am ET

The global economic crisis accelerated in October, contributing to continued losses in the hedge fund industry, with the HFRI Fund Weighted Composite Index falling nearly 6% for the month.

The index has plummeted more than 16% through October, and has lost more than 12% since Sept 1. On top of performance-based losses totaling $115 billion, investors withdrew more than $40 billion from hedge funds in October, cutting assets under management in the global hedge fund industry to $1.56 trillion, the lowest it has been since the end of 2006. The October losses follow a challenging third quarter, when global hedge funds assets fell by $210 billion.

Investors withdrew capital broadly across equity hedge, event-driven, relative value and macro strategies; each has net investor withdrawals for 2008. In October, investors withdrew almost $11 billion from macro strategies, despite a performance gain of over 4% through the end of October; the Standard & Poor’s 500 has declined more than 35% over the same period.

The largest capital reductions came from funds of hedge funds, which lost over $22 billion. Funds of funds have underperformed the overall industry so far this year, with the HFRI Fund of Funds Index posting an 18.5% decline, compared to a loss of 16% for the HFRI Fund Weighted Composite Index.

More than half of October capital outflows—52%—were from firms with more than $5 billion under management. These funds represent only 5.5% of the number of funds in the industry, but control over 58% of all hedge fund capital.

“Performance of the hedge fund industry has declined over 17% since October 2007, making the current performance drawdown the largest in history,” said Kenneth Heinz, president of HFR. “The industry has now registered five consecutive months of losses, another inauspicious first. Consolidation is likely to continue into 2009 as investors across all asset classes indiscriminately liquidate assets to move portfolios into cash holdings.”

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