Hedge Funds Burned by August Market Heat

Many of the world’s largest hedge funds have been left nursing billions of dollars in losses following the industry’s most brutal month since the collapse of Lehman Brothers.

Bryce Duffy | Stone | Getty Images

Falling equity markets worldwide have caught hedge fund managers off-guard, leading to significant losses as portfolios declined in value and managers sold holdings, crystallizing losses.

According to provisional estimates from consultancy Hedge Fund Research, the average hedge fund has lost 4.1 percent during August – making the month the industry’s fourth worst ever.

Among the biggest losses are those at the $36 billion Paulson & Co, which shot to prominence thanks to its spectacular bets against the US subprime market in 2007. As of August 19, the firm’s flagship Advantage Plus fund was down 14 percent in the month, one investor revealed – taking the funds losses to just under 39 percent – around $4 billion – so far this year.

Other so-called “event driven” funds – which trade around specific events such as takeovers, IPOs or bankruptcies – have also suffered. Owl Creek Asset Management, run by Jeffrey Altman, saw its flagship $5 billion offshore fund down 9.3 percent by mid August, while York Capital’s $2 billion York Investment fund had lost 5 percent.

Insiders say many funds were caught out by the market’s sudden preoccupation with macroeconomic events, particularly in the US. This wrongfooted managers who were focused on fundamental bottom-up analysis of companies.

Many traditional equity long/short managers, which aim to protect their “long” bets with “short” positions, were caught out because they had only put on light hedges against market falls.

Highbridge Capital, the fund owned by JPMorgan, saw its long/short equity fund down 9.2 percent by the middle of this month. Pershing Square, the activist hedge fund manager run by Bill Ackman, saw its flagship $5.5 billion fund down 6.7 percent.

Very few funds have avoided losses, according to brokers. “We’ve seen a very big deleveraging from managers,” said the head of one large prime brokerage.

Similar losses came at the $5.4 billion flagship fund of Perry Capital, which was down 5.4 percent, according to an investor.

Big-name European funds have also seen their portfolios dented. Egerton Capital, one of Europe’s oldest hedge funds, saw its main vehicle drop just under 5 percent in the first two weeks of August.

Sloane Robinson has seen losses across its range of funds. The $1.4 billion Sloane Robinson Global fund was down 7 percent mid-month, while the $2.6 billion Sloane Robinson Emerging Markets fund was down nearly 11 percent.