Hedge fund January losses worst on record

By Svea Herbst-Bayliss

BOSTON (Reuters) - Most U.S. hedge funds bled red ink in January as tumbling stock markets dealt the loosely regulated portfolios the worst start to a new year since industry analysts began tracking their performance.

By mid-January some of the industry's savviest managers including Bruce Kovner, Lee Ainslie and Leon Cooperman were nursing losses at their flagship funds. At the Galleon Technology fund and the Mellon's Global Opportunities and AlphaAccess funds, losses were also very sizable, according to people who saw the numbers but weren't authorized to speak about them.

By month's end, the average fund had lost 3.60 percent, data released by BarclayHedge on Thursday show. Data from the Hennessee Group, a competing industry performance tracker, paint only a slightly better picture with hedge funds down 2.8 percent in January after inching up 0.3 percent in December. Last year hedge funds gained 11.6 percent.

January's biggest losers were emerging market funds which tumbled 8.81 percent, quickly erasing more than one-third of the 24 percent gain they notched in 2007.

Traditionally January has been a strong month for hedge funds, but this year managers were rattled by fears of a possible U.S. recession and fast tumbling stock markets, including one-day losses of over 7 percent in Germany's and India's main exchanges.

The last time the $2 trillion hedge fund industry suffered January losses was in 2005 when the average fund slipped 0.36 percent, Hennessee data show. Before that, the only other loss ever recorded for the first month of the year came in 1998, the Hennessee Group, which has been tracking performance since 1993, said.

Several industry investors speculated privately that things may be even worse than what Thursday's numbers show because loosely regulated hedge managers are not required to report their performance and often stop saying how they did when losses pile up.

Investors and analysts alike began bracing for poor returns from the middle of the month when industry stars stumbled. "I knew it was going to be very ugly this month when I got the mid-month numbers," said one large hedge fund investor who asked not to be named. "Some big names had pretty big losses and I don't know how they are going to make them up."

Still, some analysts said hedge funds did what they were supposed to do and helped defend some portfolios against the full brunt of the stock market's losses when the benchmark Standard & Poor's index fell 6.1 percent in January.

Most hedge fund managers, however, were poorly positioned, analysts said, noting that only those who bet exclusively that securities will fall fared well last month.

Equity Short Biased funds jumped 6.97 percent and the Global Macro Index gained 1.28 percent, data from BarclayHedge show. "Obviously the short sellers benefited nicely from taking the other side of the losses suffered by hedge funds that maintain a long bias," BarclayHedge founder Sol Waksman said.

(Additional reporting by Dane Hamilton in New York, editing by Richard Chang)