Hedge funds deliver worst returns in decade-HFR

By Svea Herbst-Bayliss

BOSTON, Sept 8 (Reuters) - Hedge funds, which often promise to make money in all markets, are delivering their worst returns in a decade, according to new data released on Monday.

In the first eight months of the year, the average hedge fund lost 4.83 percent, according to data from Chicago-based hedge fund tracking firm Hedge Fund Research. In 1998, when hedge fund Long Term Capital Management collapsed, the average fund was off 5.5 percent, HFR said.

"It is taking longer to work out the subprime mess than most people anticipated," said Sol Waksman, who heads hedge fund research group BarclayHedge said. "The subprime mess started in the fixed income markets but now it is a problem in the stock market and not just the U.S. markets."

In August the average hedge fund lost 1.37 percent with funds specializing in emerging markets suffering the biggest losses. The HFRI Emerging Markets Index fell 5.02 percent.

Hedge funds often promise to make money in all markets by relying on techniques like short-selling that are off limits at many mutual funds. While the average U.S. stock mutual fund has tumbled even more, losing roughly 13.28 percent through September 4, many investors are unhappy with hedge funds' poor performance especially because they charge hefty fees, investors and industry analysts have said.

Falling oil and metals prices plus a rising U.S. dollar proved problematic for many hedge funds in August, leaving so-called global macro funds off 1.16 percent during the month. For the year, these types of funds are now up 2.57 percent.

The best performers this year are short-sellers who do nothing but bet on the decline of the markets. As a group they are up 9.76 percent in the first eight months of the year, even though they slipped 0.31 percent in August. Doug Kass' Seabreeze Partners Management, for example, is up roughly 25 percent amid bets that companies like Fannie Mae (FNM.N) and Freddie Mac (FRE.N) would fall more, someone who is familiar with the fund said.

As fund managers find it ever more difficult to find a trend, more are posting heavy losses that are prompting clients to ask for their money back, several investors said.

Last week commodities oriented hedge fund Ospraie Fund said it would shut down amid a crippling 39 percent decline through the first eight months of the year.

Even some funds that normally treat their clients to large gains are suffering. Citadel Investment Group's $14 billion flagship fund is off 6 percent even though two smaller offerings are up over 20 percent each, someone familiar with their performance said.