Hedge Fund Results Seen Going From Bad to Worse

While September was brutal for hedge funds, October was even worse.

Hedge funds themselves do not announce their results, but three industry trackers—Barclay Hedge, Hedge Fund Research and Hennessee Group—will disclose over the next few days just how poorly the $1.9 trillion industry performed last month.

It was a period of plunging stock prices, frozen debt markets and fire sales by banks scrambling to boost cash.

"You had one of the worst months in the equity markets that you had in decades. You add to that the ban on short selling, which destroyed convertible arbitrage, and the equity strategies were hurt badly," said Sol Waksman, founder of Barclay Hedge.

Some of the most successful names in the industry lost more money in October—even after a dismal September marked by the Lehman Brothers Holdings bankruptcy, the near-collapse of American International Group , and one of the steepest stock-market drops ever.

David Einhorn's Greenlight Capital, lauded for predicting Lehman's financial woes, suffered heavy losses from a short position on Volkswagen AG after the German carmaker's shares spiked.

Greenlight, down 16 percent in the first nine months this year, is seen posting bigger declines for October, tracking firms said.

Ken Griffin's Citadel Investment Group, down 15 percent in September, is seen dropping further in October, according to Hennessee.

Lee Ainslie's Maverick Fund is expected to be down again after falling more than 19 percent in September, Hennessee said.

Also stumbling is Goldman Sachs Group Inc, which told clients the $7 billion Goldman Sachs Investment Partners fund has lost nearly $1 billion since its launch in January due to bad bets on commodities, metals, energy and agriculture.

Earlier Thursday, shares of London-based hedge fund managers Man Group tumbled 31 percent partly on fears the company's Man Global Strategies fund would see more outflows.

Man's total assets under management have fallen to $61 billion this week from $68 billion at the end of September.

The HFRX Global Hedge Fund Index, compiled by Hedge Fund Research, had a 9.3 percent decline in October, and through Tuesday was down 19 percent this year.

By comparison, the Standard & Poor's 500 Index fell 17 percent in October—its ninth-worst monthly decline ever—and is down 32 percent for the year.

Still, the poor performance of hedge funds—which charge high management and incentive fees—shook up confidence in the sector, especially since the investment vehicle is supposed to protect clients by serving as a "hedge" against market swings.

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Charles Gradante, co-founder of Hennessee, said hedge funds overall were down 7 percent in October, about 3 percentage points lower than they "should be." Usually, hedge funds fall about one-third as much as the overall market, he explained.

"They were down so much largely because of the volatility, and markets not acting on fundamentals but fear," Gradante said.

Some of the hardest hit were funds focused on emerging markets, Europe and convertible arbitrage, he said.

Not all funds suffered. Short-seller funds were up about 10 percent for the month.

Even so, fund managers contended with plunging markets, anxious clients pulling out their money, and wide-scale deleveraging that put more pressure on asset values.

Add to that a U.S. ban on short-selling.

"I would expect that redemptions by historical standards are quite high. Not a day goes by where we don't see that such and such a fund is putting up gates," said Barclay's Waksman.

Michelle Celarier, editor of Absolute Return, a magazine focused on the hedge fund industry, said it's too early to predict if the industry's October results lagged September.

The fund trackers disclose industry data based on results submitted by thousands of funds.

Based on preliminary data, at least one-half of the funds that submit data to the magazine lost money in October.

But with three of the five worst months in a decade recorded in March, July and September this year, it is clear hedge funds are suffering.

"I think we can predict September and October together will be worst back-to-back months that we've ever seen," Celarier said.

And as demand for redemptions drain cash, "I don't see it getting any better anytime soon."

Copyright 2008 Reuters. Click for restrictions.