October 20, 2015 / 6:25 PM / 4 years ago

UPDATE 1-Hedge funds suffer biggest quarterly drop in assets since 2008 -data

(Adds details on strategies and funding for them)

By Svea Herbst-Bayliss

BOSTON, Oct 20 (Reuters) - Hedge funds suffered their biggest quarterly loss in assets since the financial crisis during the three months that ended in September, data released on Tuesday showed, putting the industry on track for its worst year since 2008.

The secretive industry that caters to wealthy investors, including pension funds and endowments, saw assets shrink by $95 billion to 2.87 trillion in the third quarter, research and tracking firm Hedge Fund Research reported.

The declines were driven by heavy losses when markets were roiled by concerns about slowing growth in China, sliding commodities prices and a likely U.S. Federal Reserve interest rate hike. The average hedge fund lost 3.9 percent during the third quarter.

Investors still put in more money than they took out, leaving net inflows at $5.6 billion but it was a small amount compared with the $21.5 billion added during the second quarter and the $18.2 billion added in the first quarter, HFR said.

For the year through the end of September, the average hedge is down 1.5 percent, the worst showing since the end of the financial crisis but still less than the Standard & Poor’s 500 roughly 7 percent loss over the same period. In 2011 hedge funds lost 5.25 percent after having tumbled 19 percent in 2008.

Declines at some of the industry’s biggest funds are far worse than average, a fact that could fuel criticism of the industry’s traditionally high fees. The year’s losses have also put them on track to post their worst returns since 2008.

William Ackman’s Pershing Square Holdings portfolio, one of the industry’s most prominent activist funds which ranked among last year’s best performers, was down about 12.6 percent for the year after losses in August and September. It had made up some ground in early October. Ackman oversees roughly $16.5 billion in assets, down from roughly $20 billion earlier this year.

David Einhorn’s Greenlight Capital, meanwhile, is off 17 percent for the year through September.

As investors consider how to react to the year’s poor numbers, one trend is already being seen - investors have a new appetite for smaller hedge funds after years of favoring the biggest players.

Funds with more than $5 billion in assets, which oversee roughly 70 percent of the industry’s total assets saw $300 million leave their funds during the quarter. Smaller funds that manage between $1 billion and $5 billion in assets took in $3.6 billion and small funds that manage less than $1 billion in assets took in $2.4 billion in new money.

“Investors expanded allocations to small and mid-sized firms in 3Q, reversing a trend of steadily increasing the capital concentration into the industry’s largest firms, as financial market volatility increased and hedge funds outperformed equity markets,” said HFR President Kenneth Heinz.

Meanwhile so-called global macro funds that bet on currencies, interest rates, and stocks saw investors pull out a net $5.1 billion during the quarter. Several of these funds ran into trouble lately and Fortress Investment Group said it was shuttering its macro fund, which lost on the Swiss franc and later in Brazil.

Equity hedge funds, which trade stocks and make up the bulk of industry assets, took in a net $2.4 billion in the third quarter, raising its total to $23.8 billion for the year. Hedge funds, unlike mutual funds, do not allow investors to pull their money out whenever they wish. (Reporting by Svea Herbst-Bayliss; Editing by Richard Valdmanis and Grant McCool)

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