Hedge Funds Take a Beating in January

February 6, 2008 |

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Chicago’s Hedge Fund Research released a statement saying that January was the worst month for hedge funds since 1998 — according to their data.  While reading some of the other blog postings about this “news” I was struck not by the postings themselves, but the comments to the posts.  A number of things became apparent … first that many people have no idea what hedge funds are or how they operate, and two, many people are under the impression that hedge funds are (by definition) hedged, so they can’t understand why so many hedge funds seem to suffer during periods like this.

Ah, if only all hedge funds were hedged!  The world would be a simple and straightforward place. But seriously, times like this are productive because the weak are culled from the herd.  I wouldn’t be surprised to hear of many hedge fund managers rebounding soon.

Here is the story as the Financial Times (FT.com) covered it:

Last month was the worst for hedge funds since the August 1998 crisis that presaged the collapse of Long Term Capital Management, according to data from Chicago-based Hedge Fund Research.

The average fund tracked by the HFRX index lost more than 2 per cent in January, with event-driven funds, which include activists, the worst hit with a 3.39 per cent loss.

Equity long-short funds – which also tend to be exposed to declines in stock markets – were badly hit too.

Funds that had long positions on stock markets lost out as UK blue-chips fell 6.6 per cent and the S&P 500 fell 6 per cent during the month.

For example, the computer-driven RIEF fund from Jim Simons’ Renaissance Technologies, one of the best-respected hedge funds, was down about 4 per cent, as it is structured to be long the market.

Simon Ruddock, founding partner of Albourne Partners, the London-based hedge fund investment advisers, said funds tended to do badly when markets changed direction but quickly made back losses.

Still, some performances are likely to be galling for investors, with many funds down more than 10 per cent.

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