Notes on Hedge Fund Struggles

As recently reported at Bloomberg, hedge funds have produced their worst first-half performance since 1990, when the firm Hedge Fund Research began tracking returns of the hedge fund industry. Hedge funds are down collectively 0.75% year to date. Lower equity returns, the impact of volatility, and the inability to borrow cheaply due to the credit crunch all appear to be affecting performance.

The impact of less leverage has been discussed for a while now, and the fallout of lower equity returns is evident to all investors. What has not been discussed as much is how increased volatility is apparently affecting some funds. This is ironic given that many funds and traders thrive on volatility, or at least need some type of market movement. Now, many managers are finding that they cannot cope with the changing nature of the markets.

As a result of the poor performance of the market, and in particular hedge funds that are often expected to protect against losses, investors appear less willing to stick around for the long haul, and instead are looking for more immediate returns. Given the current challenges for hedge fund managers, large established funds with both proven strategies and proven managers are doing well. On the other hand, small funds are seeing lower returns, redemptions, and in some cases are closing up shop (see previous post).

In addition to hedge fund veterans, such as John Paulson and Philip Falcone, whose funds have returned 26% and 42% year to date, respectively, some quantitative funds using computer modeling for investment decision making are also up this year. New funds, with managers spinning off from existing larger, more credible funds are also seeing inflows of capital as investors look for managers and strategies that generate confidence and offer more reliability. No doubt struggling funds will continue to look for ways to generate alpha and keep nervous investors, and their capital, from heading for the exits. The trend of hedge funds scooping up talent, just as Wall Street is cutting back on salaries and bonuses, is likely to continue (see previous post).

Comments

[notsosmart]

the same people that created this mess are rewarded because of how "smart" they are.its like financial musical chairs.you can tell by the fact nothing was learned from the savings & loan fiosco.nothing learned from the tech bubble.capitalism might be the best at the moment but forms of socialism are creeping in.greed could cause it to fail ultimately.how sad.

[AT]

Down 75 bps year to date. Oh my. What an awful year. I'd definitely rather be down 10-12% in the equity markets or up 1% in the bond market.

[secmaven]

People who have money to dump into hedge fund gambling can pay higher income taxes.