Despite regaining some ground in December, a disastrous fourth quarter left the average hedge fund down by more than one-fifth on the year, according to Morningstar.
The Morningstar 1000 Hedge Fund Index lost 7.9% and 9.8%, respectively, in September and October, before a 2.1% rise in December cut the index’s quarterly loss to 10.3%. For the full-year, the index was down 22.2%.
“In 2008, hedge fund managers generally failed to deliver,” said Nadia Papagiannis, a hedge fund analyst at the Chicago-based research provider. “The average hedge fund may have lost less than the stock market, thanks in part to large cash allocations, but this level of performance was not why investors agreed to pay 2% management fees and 20% performance fees.”
And investors reacted: According to Morningstar, $44 billion left the industry last year in the form of redemptions, mostly in October and November. Not all hedge funds survived the onslaught of withdrawals and poor performance: The number of hedge funds dropping out of Morningstar’s database more than doubled last year, with 1,158 single-manager funds and 490 funds of hedge funds removed from the index, although not all removals are the result of hedge fund liquidations.
Last year’s best-performing strategy suffered an unfortunate turnaround this year, as emerging markets funds lost an average of 45.6%. The Morningstar Corporate Actions Hedge Fund Index fell 28.9% in 2008, while global debt funds lost 28.5%, convertible arbitrage funds lost 24.9% and debt arbitrage funds lost 16.7%. Developed markets funds fell 11.9% and global non-trend-following funds fell 1.2%.
Just one Morningstar index finished the year up: Global trend hedge funds added 9.8% last year.