Study: Hedge Funds Suffer Fourth Worst Performance Quarter in History

(October 19, 2011) — Performance-based hedge fund losses caused the industry’s asset total to slip back below $2 trillion at the end of last quarter, according to Chicago-based Hedge Fund Research.

According to the firm, a combination of uncertainty over the European sovereign debt crisis and weakening economic data contributed to volatility across equity, credit, commodities, and currencies, fueling the industry’s fourth worst performance quarter in history and reducing assets from a record level.

These performance declines reduced total hedge fund industry capital by $85 billion, HFR showed in its Global Hedge Fund Industry Report: 3Q11. “The asset decline ends two consecutive quarters in which total capital under management eclipsed new record levels, and brings total hedge fund industry AUM to $1.97 trillion,” the report said.

“The third quarter presented an extremely challenging performance environment, with asset volatility in many respects on par with financial crises in 2008 and 1998,” said Kenneth J. Heinz, President of HFR, in as statement. “However, as investor risk aversion increased across all asset classes, hedge fund investors have maintained a critical but forward-looking disposition, reinforcing their commitments to preferred strategy areas and core funds, and positioning their allocations to benefit from opportunities created by current dislocations and volatility.”

The performance declines did not stop investors from allocating new capital to the hedge fund industry, with net inflows in the third quarter totaling $8.7 billion. This marks the ninth consecutive quarter in which the industry has experienced net inflows from investors and brings the year to date inflow total to $70.1 billion, HFR asserted.

Meanwhile, investors showed preferences in certain strategies, HFR showed. Macro funds have been in favor throughout 2011, with nearly $20 billion of inflows year to date. On the other hand, equity hedge funds, which comprise nearly 30% of all industry capital, experienced $2.7 billion in net inflows for the quarter.