Hedge Funds: The Shakeout Is in Progress

In the last bear market after the popping of the tech bubble, hedge funds held their own and exhibited positive and uncorrelated returns to other asset classes. This time, hedge fund returns have been far more correlated with equities.

A recent NY Times article states that HFR reports that the average hedge fund is down 4% YTD. Other figures available to me show YTD returns to be closer to 5%. The negative returns are not just attributable to the positive correlations to the S&P 500. The credit crunch has hit hedge funds too as prime brokers reduce risk:

It is now 5 to 10 percent more expensive for hedge funds to borrow from banks than it was a year ago, and banks are increasingly hesitant to lend to hedge funds for long periods.

Investor reactions have been predictable:

"I think we’re seeing what these hedge fund managers really, truly are,” said Robert Discolo, head of hedge fund strategies for A.I.G. Investments, an asset manager within the insurance giant A.I.G. (AIG) “And some of them really can’t make money in a difficult environment."

In reaction, some hedge funds are reported to be reducing leverage. Others are cutting fees (subscription required) to try and retain assets.

The shakeout is truly in progress. It remains to be seen how the hedge fund business model survives.

Disclosure: None

Comments

[ain't no fo...:]

some would hope the model DOESN'T survive...

2008 Sep 15 09:09 PM

[Steven Hansen:]

the hedge funds with their leverage helped create this environment. may they rest in peace.

2008 Sep 15 10:41 PM

[Old Trader:]

Perhaps hedge funds will return to their roots..meaning what they were 30 -40 years ago.....an absolute return vehicle, rather than a "toy" for quants and gunslingers...

2008 Sep 16 02:52 AM

[InvestorCP:]

The model of leverage to generate returns will take a serious hit, and I wonder whether those who have only leveraged based funds can de-leverage and still produce returns. All hedge funds are not leverage based of course, and perhaps a refocus to the absolute return goal will lead to more long and value orientation in the products.

2008 Sep 18 09:55 AM