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Cruel September For Hedge Funds
Hedge funds get pummeled last month by short-selling ban and unpredictable market gyrations.
October 3, 2008
In what is expected to have been the worst month for hedge-fund performance in a decade, funds could be down as much as 5% to 9% on average in September, according to hedge-fund research firm Hennessee Group.
There were several factors playing into the dismal performance in September. For one, the Securities and Exchange Commission implemented a short-selling ban that went into effect in the middle of last month which cut into one of the most prevalent strategies that hedge fund managers use--the long/short equity strategy. (The ban was recently extended further, until the third day after the proposed $700 billion bailout plan is approved, but will not extend beyond Oct. 17.)
Additionally, fund managers are being pressured by the “de-leveraging by large institutions,” which has caused fundamentally sound long investments to sell off more than the markets, and had the reverse effect on fundamentally weaker companies. Those dynamics have created a difficult environment for fund managers to achieve alpha, or exceed broader market performance.
And that has cut both ways. Hedge funds were also driven lower in part by extreme levels of volatility in the broader equity markets despite reduced exposure. On a relative basis, however, hedge funds outperformed the broader markets, according to Hennessee Group. The S&P 500 was off 9% last month, just as some of the worst-performing hedge funds were on average.
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