NEW YORK (Reuters) - As brutal as September was for hedge funds, October was even worse.
Hedge fund industry trackers Barclay Hedge, Hedge Fund Research and Hennessee Group will report over the next few days just how poorly the $1.9 trillion industry performed last month. It was a period of plunging stock prices, frozen debt markets and fire-sales by banks scrambling to boost cash.
“You had one of the worst months in the equity markets that you had in decades. You add to that the ban on short selling, which destroyed convertible arbitrage, and the equity strategies were hurt badly,” said Sol Waksman, founder of industry tracking service Barclay Hedge.
Some of the most successful names in the industry were hammered last month, as funds lost more money than they did in a September that featured the Lehman Brothers bankruptcy, the near collapse of American International Group (AIG.N), and one of the steepest stock market drops ever.
David Einhorn’s Greenlight Capital, lauded for predicting Lehman’s financial woes, suffered heavy losses from a short position on Volkswagen (VOWG.DE) after the German carmaker’s shares spiked. Greenlight, down 16 percent in the first nine months this year, is seen posting bigger declines for October.
Ken Griffith’s Citadel Investment Group, down 15 percent in September, is seen dropping further in October. Lee Ainslie’s Maverick Fund is expected to be down again after falling more than 19 percent in September.
Also stumbling is Goldman Sachs (GS.N), which told clients the $7 billion Goldman Sachs Investment Partners fund has lost nearly $1 billion since its launch in January thanks to wayward bets on commodities, metals, energy and agriculture.
The HFRX Global Hedge Fund Index, compiled by Hedge Fund Research Inc, had a negative 9.3 percent rate of return in October and through Tuesday was down 19 percent this year.
By comparison, the Standard & Poor’s 500 Index fell 17 percent in October — its ninth-worst decline ever— and 32 percent for the year.
Still, the poor performance shook up confidence in an investment vehicle that was supposed to protect clients by serving as a “hedge” against market swings.
Charles Gradante, co-founder of Hennessee Group, said hedge funds were down 7 percent in October, about 3 percentage points lower than they “should be.” Usually, hedge funds fall about one-third as much as the overall market, he explained.
“They were down so much largely because of the volatility, and markets not acting on fundamentals but fear,” Gradante said. Some of the hardest hit were those focused on emerging markets, Europe and convertible arbitrage, he said.
Not all funds suffered. Short-seller funds were up about 10 percent for the month.
Even so, fund managers were forced to deal with plunging markets, anxious clients pulling out their money, and wide-scale de-leveraging that put more pressure on asset values. All that plus a ban on short-selling.
“I would expect that redemptions by historical standards are quite high. Not a day goes by where we don’t see that such and such a fund is putting up gates,” said Barclay’s Waksman.
Reporting by Svea Herbst-Bayliss in Boston and Joe Giannone in New York; written by Joe Giannone; editing by John Wallace