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Investment performance: Hedge fund managers will be back

Difficult market conditions cost the hedge fund industry $210 billion over the third quarter, according to Hedge Fund Research. Of that, $31 billion was in outflows as investors pulled money out. The entire industry, which was thought to hit $2 trillion last year, is now at $1.72 trillion, says HFR.

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.

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