Hedge Funds Down 2.69% In Nov., May Lose 60% Of Assets In ‘08

Dec 9 2008 | 1:59am ET

Hedge funds are slouching toward 2009, as another major index shows big losses for the industry as the year nears its end.

The Hennessee Hedge Fund Index fell a further 2.69% in November, leaving it down 18.44% year-to-date. Long/short equity hedge funds lost 3% on the month (down 17.65% YTD), arbitrage and event-driven funds lost 2.43% (down 17.63% YTD) and global/macro funds lost 2.11% (down 20.41% YTD).

Those numbers are ugly, but the optimists at Hennessee note that things could be much worse: The Standard & Poor’s 500 Index is down 38.97% this year after shedding another 7.48% in November. Not even the worst-performing strategy of 2008—emerging markets, which, ironically, was last year’s best—can top the S&P500 in red ink.

“While the Hennessee Hedge Fund Index is down 18.44% this year, it has significantly outperformed equity benchmarks on a relative basis,” said Lee Hennessee, managing principal of the Hennessee Group. “While not an attractive absolute return, many investors are thankful to have hedge fund allocations this year, especially when compared to traditional asset classes.”

Of course, when the average hedge fund is down almost 20%, the news can’t be all good.

“While many managers are seeing attractive investment opportunities, many are struggling to retain investors and their capital bases. In 2008, we have seen dramatically more hedge funds freeze redemptions/enact redemption gates and force liquidate than in the history of the hedge fund industry.” said Hennessee’s Charles Gradante. “We expect year-end investors’ redemptions to be significant, with the average fund returning 15% to 25% of investors’ assets. When you consider the significant number of liquidations, redemptions and the negative performance of hedge funds this year, it is possible that the entire hedge fund industry could start 2009 at 40% the size it was at the beginning of 2008.”

As noted above, emerging markets are on pace to be the worst-performing strategy of the year, according to the Hennessee index. They are down 33.2% on the year after losing another 6.46% in November. Other dismal efforts were put in by private investments in public equity/private financing funds (down 5.94% last month, down 16.85% YTD), convertible arbitrage funds (down 4.5%, down 24.63% YTD), Latin America funds (down 4.49%, down 27.88% YTD) and technology funds (down 4.49%, down 18.86% YTD).

On the bright side, a half-dozen strategies posted positive returns in November, although just two are in the black year-to-date. Short-biased funds remain, without peer, the best-performing strategy on the year, up 27.34% after rising 4.13% on the year. Macro funds are also up on the year, at 1.21% after adding 1.23% in November.


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