Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Hedge funds see worst year since financial crisis

Reasons small hedgies swimming upstream
Reasons small hedgies swimming upstream

Hedge fund performance over the past three months hearkened back to the bad old days of the financial crisis.

Poor performance weighed heavily on the industry, causing the biggest net loss in capital since the fourth quarter of 2008, according to data released Tuesday by HFR. The $95 billion decline pushed total industry assets further from the vaunted $3 trillion mark.

As measured by the HFRI Fund Weighted Composite Index, the industry saw a 3.9 percent performance drop in the third quarter, taking the barometer into negative territory for the year at minus 1.5 percent. At this pace, hedge funds will turn in their worst performance year since 2011.

The bright side is that the industry actually outperformed the equity market through the end of the quarter, as the fell more than 6 percent through the first nine months. The S&P has since rebounded, jumping 5.6 percent in October to pull within 1.5 percent of breakeven for the year.

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Kenneth J. Heinz, HFR's president, said funds have followed suit and should be able to reverse the earlier money drain.

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"Recent market turmoil has resulted in increased risk aversion by investors but has also created opportunities for innovative approaches in key tactical and strategic areas," Heinz said in a statement. "Funds of all sizes have already experienced a powerful performance recovery through mid-October, which is likely to drive industry capital gains into year end."

Investors actually have been putting money to work in hedge funds this year.

Total inflows came to $47.9 billion in the third quarter, offsetting $42.3 billion in redemptions for $5.6 billion in net flows, according to HFR. Event-driven strategies have performed poorly, losing 5.1 percent in the quarter and 2.85 percent for the year, yet saw inflows of $5.4 billion.

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Equity strategies have received the most cash, pulling in $23.8 billion for the year and $2.4 billion for the quarter despite losing 2.3 percent through the first nine months.

The best performing industry strategy has been volatility, which was up 5.5 percent, while Latin America (down 20.2 percent) and energy (off 12.4 percent) represented the biggest losses.