Hedge Funds Have Worst Two Months in At Least 8 Years

By Tomoko Yamazaki

Nov. 19 (Bloomberg) -- Hedge funds capped their worst two months in at least eight years in October as global declines in stocks and commodity prices curbed returns and investor withdrawals cut assets, according to Eurekahedge Pte.

The Eurekahedge Hedge Fund Index, tracking more than 2,000 funds that invest globally, dropped 4.5 percent last month after falling 5 percent in September, the Singapore-based data provider said. October's drop, based on 71 percent of constituent funds reporting as of today, pushed the index down 12 percent on the year, the worst since Eurekahedge began publishing data in 2000.

Investors withdrew a net total of $62.7 billion from hedge funds last month, according to Eurekahedge, shrinking the industry by $110 billion to $1.65 trillion of assets as markets tumbled amid a global recession. Assets may fall to about $1 trillion by the middle of next year, Citigroup Inc. said in a report this week.

``The industry will probably face more redemptions for a while,'' said Akihiro Nishi, executive director at Tokyo-based Mitsubishi Asset Brains Co.'s investment advisory division. ``The decline is a reflection that a majority of hedge funds seem to be taking risks betting more on beta,'' a gauge of a fund's risk that measures the volatility of its past returns in relation to the returns of the benchmark.

The October loss compares with a 19 percent decline in the MSCI World Index, which tracks more than 1,700 companies worldwide, and a 22 percent drop in the Reuters Jefferies CRB Index, a benchmark for commodities.

Hedge Funds Fold

About 350 hedge funds shut down in the first half of this year, up 16 percent from 303 a year earlier, according to Hedge Fund Research Inc. An estimated 700 may go out of business by the end of the year, according to the Chicago-based firm.

``The hedge fund industry is witnessing some of the biggest asset outflows in over three years, but we also continue to see less risk-averse investors seeking entry into previously closed funds or retaining their current allocations in view of substantial future gains,'' Eurekahedge said in its October performance commentary, posted on its Web site.

Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall.

Best Performers

By strategy, managers trading futures, known as commodity trading advisers or CTA funds, outperformed the industry by exploiting directional trends in the commodity and currency markets, Eurekahedge said. Similar trades also helped boost the performance of macro-fund managers, who wager on trends in stocks, bonds and currencies worldwide, the firm said.

Managers of so-called long-short funds, who bet on rising and falling prices, had the biggest redemptions last month at $24 billion, followed by CTAs, which saw withdrawals of $12.3 billion as investors made wrong-way bets on commodity prices. Other strategies saw single-digit redemptions, Eurkeahedge said.

In terms of regional mandates, the Eurekahedge Japan Hedge Fund Index was the best performer, declining 2.8 percent in October even as the benchmark Topix index slid 20 percent.

Trades that involved selling regional stocks while taking advantage of currency moves helped stem losses, Eurekahedge said in a preliminary report last week. The yen strengthened more than 7 percent against the dollar in October, the most in a decade.

Funds investing in Latin America followed with a 3.8 percent drop, while the Eurekahedge Asian Hedge Fund Index lost 5.3 percent and the Eurekahedge North American Hedge Fund Index fell 4.7 percent.

The index tracking emerging-market hedge funds was the worst performer, declining 8.1 percent, while the Eurekahedge European Hedge Fund Index slid 7.2 percent, according to the data provider. All October index data are preliminary figures.

To contact the reporter on this story: Tomoko Yamazaki in Tokyo at tyamazaki@bloomberg.net