Market Turbulence Pummels Hedge Fund Gains

(August 9, 2011) — After Monday’s stock market plunge, marking the worst day for the market since the fall 2008 financial crisis, hedge funds are suffering like the rest of the financial world.

According to Hedge Fund Research, the average fund in the $2 trillion hedge fund industry was up only 1.55% through the end of July. On Friday, it lost 1.1%, the data firm’s benchmark showed.

Furthermore, as per its narrower, investable industry index, managers overall were 1.9% lower this month and 4.12% down this year, Global Pensions reported.

HFR’s Kenneth Heinz said the losses were fueled by Europe’s debt crisis, along with the downgrade of the nation’s triple-A credit rating. In a statement, he said: “Financial markets continue to be dominated by uncertainty and volatility, and investors are allocating to hedge funds, expecting and anticipating this uncertain environment to persist. The many catalysts in this environment, including the European sovereign debt crisis, the debate surrounding the U.S. debt ceiling, accelerating Asian inflation, fallout from bank stress tests, and mixed U.S. employment and housing statistics, suggest risk is changing faster and more dynamically than ever before. Hedge fund investors are now more sophisticated than ever and are allocating to areas such as Macro, Relative Value and various quantitative strategies in anticipation of opportunities to be created by transition, volatility and risk.”

For some major hedge fund’s, such as John Paulson’s Advantage Fund that has already experienced losses of 15%, the effects of the recent market plunge will be even more severe.

The recent painful losses experienced by hedge funds comes less than a month after HFR revealed that hedge fund net assets reached a record level of $2.04 trillion. Meanwhile, in July, based on information from its database of 2,700 investors, Preqin noted that investors are prepared to allocate up to $195 billion to hedge funds in next 12 months.