Hedge funds get a raw deal in the press. Its easy for journalists to point to a few "hedge funds" losing money, and then condemn the asset class as a whole. However, noone seems to make the effort to differentiate between the "hedge fund" label - which is really a synonym for "unregulated investment products" - and various strategies, some of which are highly leveraged and volatile. And in Australia of course, hedge funds are regulated and required to meet the same standards as all managed funds, including licensing and product disclosure statements.
Perhaps investors do need to be more selective of managers and strategies; but the only type of news that is relevant to managed funds as a whole is the level of fraud; which seems no higher for so called hedge funds than with other managed funds. Picking funds which got a strategy or view wrong is always easy in hindsight, but has zero relevance. On the other hand, poor fund returns are significant and probably reflect an illiquid, choppy market.
The same problem occurs globally. Patrick Hosking and Clare Harrison wrote an article in the Times on 20 August 2008 titled "Hedge funds at a loss to cope with mood swing".
"The hedge fund group that took a huge bet on Northern Rock as it was imploding last autumn has reportedly lost 85 per cent of its investors' money, amid evidence of a terrible spell this summer for many hedge funds.
SRM, the Monaco-based group that raised $3 billion from investors in September 2006, is down by 85 per cent, according to The Wall Street Journal, including a minus 77 per cent performance in the past year. Tight lock-up terms prevent investors from withdrawing their money.
SRM, which was founded by Jon Wood, the former UBS investment star, is also thought to have been burnt by disappointing investments in Countrywide Financial, the American mortgage group; Bear Stearns, the investment bank rescued by JP Morgan; and Cheniere Energy, a struggling Houston-based energy company.
The news from SRM, which bought more than 10 per cent of Northern Rock only to see it nationalised, comes as many rival hedge funds post losses after being wrongfooted by the sudden change in sentiment over energy prices, financial stocks and the dollar.
Many alternative asset managers, who pride themselves on their ability to make money regardless of market conditions, posted their worst figures for years in July and most are nursing losses for the year to date.
Paragon Global Opportunities Fund, which is run Polar Capital, the London-based hedge funds group, was down 12.41 per cent in July to $897.2million.
The United States-based Pequot Global Fund is believed to have been badly hit, with one expert claiming that the fund suffered a “significant double-digit” percentage loss in July, which Pequot refused to comment on.
Another big loser is Ospraie Management, which is 20 per cent owned by Lehman Brothers. Reports suggest that it has had $1billion, or 20 per cent, knocked off the value of its Ospraie Fund this year.
For months hedge funds made money positioning themselves for energy prices and mining stocks to rise and financials to fall. But that trend reversed in July. Similarly, the US dollar regained investor popularity two weeks ago, badly burning anyone positioned for it to remain weak.
John Godden, a hedge fund consultant with IGS Group, said: “Commodity trading funds, which had a storming year till June, have been hit by the falls in energy prices. They make money on trends and when trends unwind, they lose money.”
Christopher Fawcett, the head of Fauchier Partners, a London-based hedge funds investment group, said: “There was a tendency for funds that did well in June to do badly in July.” Nevertheless, Absolute Return Trust, Fauchier's listed vehicle, was up 1.8 per cent year to date at the end of July.
Hedge fund returns sank by 2.82 per cent in July, according to the HFR's index of hedge fund returns, leaving year-to-date returns at minus 3.83 per cent, a poor performance by the standard of recent years. So far in August, returns are down by 1.59 per cent.
Mr Godden said that other hedge funds were doing well, with merger arbitrage funds and dedicated short sellers “making out like bandits”."
If you think hedge funds have disappointed of late take a look at this list of legendary money managers returns published by GuruFocus.com, a web site devoted to the principles of 'value investing'.
| 12 Months | |
| Name | The Average Gain* (%) |
| Seth Klarman | -26.7 |
| Third Avenue M'ment | -23.2 |
| Bill Ackman | -18.6 |
| Martin Whitman | -18.0 |
| Ian Cumming | -17.9 |
| Richard Aster Jr | -17.9 |
| George Soros | -16.0 |
| Robert Rodriguez | -15.7 |
| Joel Greenblatt | -15.1 |
| Tweedy Browne | -14.4 |
| David Winters | -13.0 |
| Glenn Greenberg | -12.8 |
| David Einhorn | -12.5 |
| Wallace Weitz | -12.5 |
| Richard Pzena | -10.8 |
| John Keeley | -9.0 |
| Steve Mandel | -8.6 |
| Jean-Marie Eveillard | -8.3 |
| Michael Price | -8.0 |
| T Boone Pickens | -7.5 |
| Robert Olstein | -7.2 |
| Ron Baron | -7.1 |
| Bruce Berkowitz | -6.9 |
| Ruane Cunniff | -6.8 |
| Ronald Muhlenkamp | -6.7 |
| Chuck Akre | -6.5 |
| Warren Buffett | -6.2 |
| Ken Heebner | -5.7 |
| David Swensen | -5.2 |
| David Dreman | -5.1 |
| David Williams | -4.8 |
| Hotchkis & Wiley | -3.7 |
| Robert Bruce | -3.6 |
| Edward Owens | -3.5 |
| Dodge & Cox | -3.4 |
| Bill Nygren | -2.8 |
| Richard Snow | -2.8 |
| Mason Hawkins | -2.7 |
| Chris Davis | -2.4 |
| Bruce Sherman | -2.4 |
| John Rogers | -1.5 |
| Carl Icahn | -1.3 |
| Tom Gayner | -1.1 |
| Brian Rogers | -0.9 |
| NWQ Managers | -0.8 |
| Charles Brandes | -0.7 |
| Arnold Van Den Berg | 0.0 |
| David Tepper | 0.0 |
| Edward Lampert | 0.2 |
| Arnold Schneider | 4.7 |
| Mark Hillman | 6.4 |
| Irving Kahn | 13.2 |
| Sarah Ketterer | 13.6 |
| Mohnish Pabrai | 16.3 |
| Bill Miller | 29.3 |
