Large hedge funds once thought infallible are struggling to navigate through volatile markets and a liquidity squeeze. Millennium Global Investments, the $15 billion UK hedge fund, began liquidating one of its funds, an emerging markets credit fund, in October, as lending dried up. Even Citadel’s Ken Griffin admits to having lost more in September in one of his funds than ever before, explaining in an investor letter: "Regretfully, I did not foresee the financial disaster that was to unfold in September."
Bleak house
Is the outlook for hedge funds as bleak as participants claim, however? Yes, performance is down. September was a particularly difficult month for managers. The HFR composite index was down 5.5% in September, the second worst month on record. But Denise Valentine, senior analyst at Aite Group, says it is all to be expected. "I’m surprised that people are amazed by losses and closures among hedge funds given we are in a very serious financial crisis right now. Average returns are still better than those of the broad market, so hedge funds are still doing what they are supposed to be doing." Indeed the S&P 500 was down almost 9% in September. Short strategies are bolstering the overall hedge fund index returns, however. According to Edhec’s hedge fund indices, shorting was the only strategy to produce positive returns in September.
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Hedge funds down on average but not out |
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Returns of HFRI’s hedge fund indices |
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Source: HFR |
The difficult period is encouraging some managers to call it a day. Andrew Lahde sent a letter to his investors in October explaining that, despite returns of more than 850% last year, he had decided "to drop out", writing: "Recently, on the front page of Section C of the Wall Street Journal, a hedge fund manager who was also closing up shop (a $300 million fund), was quoted as saying: ‘What I have learned about the hedge fund business is that I hate it.’ I could not agree more with that statement. I was in this game for the money... Throw the BlackBerry away and enjoy life."
That some managers are giving up is also no surprise, says Valentine. "When hedge funds can’t find anything to buy, or their strategy does not fit the market environment, they stop for a few years. That has happened throughout the history of the industry. It’s only a relatively new idea that hedge funds will stay around for decades. Closing and reopening is part of their make-up. But just because they close, doesn’t mean they won’t be back."