Hedge funds worldwide posted record monthly losses in September as short sale bans and client redemptions amid the credit crisis hurt funds including Citadel Investment Group Inc., according to Eurekahedge Pte.
The Eurekahedge Hedge Fund Index, which tracks 2,431 funds that invest globally, declined 4.7 percent, preliminary figures from the data provider show. The drop is the biggest one-month loss since the firm began collecting data in 2000 and the index, down 7.9 percent through September, is set for its worst year on record.
``The volatility has been difficult even for seasoned veterans to manage; one day the markets plunge on apocalyptic fundamentals, and the next day they surge,'' said Robert Howe, founder of Hong Kong-based hedge fund manager Geomatrix (HK) Ltd., which oversees $32 million. ``As many managers just liquidate to wait out the storm, or clients do it for them, money drains out of all investment strategies.''
Hedge funds have suffered from financial market contagion triggered by the collapse of the U.S. subprime mortgage market last year, losing about $88 billion of assets on investment declines and investor withdrawals in September. That's reduced the industry's total size to about $1.8 trillion, according to Singapore-based Eurekahedge.
Citadel Investment's biggest hedge fund fell as much as 30 percent this year because of losses on convertible bonds, stocks and corporate debt, two people familiar with the Chicago-based firm said earlier this month.
Lehman Bankruptcy
Lehman Brothers Holdings Inc., once the fourth-largest securities firm, filed for bankruptcy protection in September while American International Group Inc., Fannie Mae and Freddie Mac were bailed out by the U.S. government, sending the MSCI World Index into its biggest monthly slide since August 1998.
The decline in markets also came as the U.S. Securities and Exchange Commission temporarily banned short selling of more than 900 stocks. Last week, the SEC extended a rule forcing hedge funds to tell the agency about short-sale positions amid concern investors bet against companies after spreading false rumors they will fail.
In a short sale, an investor sells a borrowed security, aiming to profit by repurchasing it later at a lower price and returning it to the holder, pocketing the difference.
Managers investing in European markets were among the worst performers, sliding 6.9 percent, followed by those investing in emerging markets, which fell 6.8 percent, according to Eurekahedge. The Eurekahedge North American Hedge Fund Index dropped 5.3 percent, while the Eurekahedge Asian Hedge Fund Index declined 4.8 percent.
The index tracking Japan investments and Latin America were least affected, losing 4.4 percent and 4.1 percent respectively.
Landscape Changed
By strategy, September marked the worst month on record for so-called arbitrage and relative value funds, which attempt to profit from price discrepancies between markets, and macro funds -- those seeking to profit from economic trends by trading stocks, bonds, currencies and commodities, Eurekahedge said.
``The financial landscape has permanently changed after the historic events of September, and markets are seized up by a crisis of investor confidence,'' the data provider said in a report posted on its Web site. ``The primary challenge for hedge fund managers is to de-leverage and resize positions to appropriate levels, and to manage cash levels in order to meet any investor redemptions in the coming months.''
A separate report by Hedge Fund Research Inc. earlier this month showed hedge funds worldwide lost 4.7 percent in September, the biggest monthly drop since the collapse of Long-Term Capital Management LP a decade ago.
The drop has dragged HFR's Weighted Composite Index down 9.4 percent so far this year, on track for the biggest annual loss since Chicago-based HFR started keeping records in 1990.
Hedge funds are mostly private pools of capital whose managers participate substantially in profits from their bets on whether the prices of assets will rise or fall.
