Hedge funds have suffered their biggest monthly monetary loss since the 2008 financial crisis in the wake of market turbulence that battered the portfolios of some of the industry's best known investors.
The sector as a whole lost $78 billion due to its performance in August, the worst monthly absolute fall in assets since October 2008 — the month following the collapse of Lehman Brothers — according to research by Citi.
"The only thing that seemed to work was cash. Of course that's the one thing they [the hedge funds] don't have," said Paul Brain, head of fixed income for Newton Investment Management and a former credit hedge fund manager.
Some of the worst hit were funds that specialised in stock picking, with David Einhorn's $11 billion Greenlight Capital having lost 17 per cent up to the end of September, Daniel Loeb's $17 bilion Third Point down about 4 per cent and Bill Ackman's Pershing Square vehicle down double digits over the summer.
Total hedge fund industry assets at the end of August stood at $3.05 trillion, according to Citi, down 0.2 per cent year on year. Total hedge fund assets have doubled since 2008, according to HFR.
Hedge funds got their name because they sought to protect investors from market volatility through hedging. But as the sector has grown, some managers have opted to instead take large, concentrated bets on specific stocks or trades.
Market volatility peaked in late August driving down share prices with investors worried by signs of a slowing global economy led by China, commodity producers and other emerging market countries.
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While final numbers are not yet in for September many in the industry expect an acceleration in losses across stocks and bonds.
Anthony Lawler, a portfolio manager at GAM, said the broad based nature of the recent sell-off was particularly painful for hedge funds that had bet hard on sectors or companies they believed were undervalued.
"Well researched equities held by stock pickers can perform badly, not because they are a bad pick, but because they are held by a concentrated group of people who can be forced to reduce or sell when the market turns south," he said.
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Sectors that were popular with hedge funds earlier this year, notably junk bonds and US biotech, have been hit particularly hard. The Nasdaq biotech index has fallen more than 20 per cent from its record peak in July.
The mining sector in terms of share and bond prices also remains very volatile as investors monitor commodities for signs of whether a long-term bottom has been made in key resources such as copper and oil.
Investors have also been hit by a sharp deterioration in the value of US junk rated bonds. US investment grade bonds are lower this year in terms of total return, while government debt has provided some solace.