Hedge funds feel the pain
By James Mackintosh in London
Financial Times
Published: March 31 2008 22:01
Hedge funds are having their worst start to the year on record after March
turned into one of the ugliest months for popular strategies and several
funds imploded.
Daily data from Chicago-based Hedge Fund Research showed that, with two
trading days to go, the average fund tracked by its HFRX index was down
2.4
per cent in March, its worst month since the collapse of Long Term Capital
Management in 1998.
January had also been a very poor month for the industry, only partially
offset by Februaryıs recovery.
The dire March performance follows disastrous results from many big,
relative value traders, who bet on price discrepancies and typically use a
lot of gearing.
Several big funds specialising in relative value strategies were hammered
by
wild swings in Japanese bond spreads, forcing sales and losses across
other markets that they traded.
³It was a very difficult month to make money for every fixed income
strategy,² said one hedge fund investor. ³At some stage, somethingıs gone
wrong for almost all trades.²
Big losers among relative value traders included Londonıs $3bn Endeavour
Capital, which plunged 34 per cent last month; London Diversified Fund
Managementıs flag****p fund, down about 10 per cent this year, and John
Meriwether, the former LTCM co-founder, whose flag****p fund is down about
28
per cent.
As well as the problems at relative value funds, managers across all
strategies suffered as the widespread bet on commodity prices going up and
the financial sector suffering turned against them.
³Iıd like to say there was a bright spot but there really wasnıt,² said
one
prime broker.
Pardus Capital Management, a New York activist with positions in Delta Air
Lines, United Airlines and Paris-based Atos Origin, on Monday suspended
redemptions on its $2bn fund to prevent it being forced to sell.
This year has seen a series of hedge fund blow-ups as banks pulled
leverage
or investors demanded their money back from illiquid strategies.
The highest profile collapse was that of Londonıs $2bn Peloton ABS fund,
which missed margin calls after betting that the price of mortgage
securities would recover. But problems have struck leveraged funds across
all investment styles, with some leveraged equity funds such as Focus
Capital, down about 80 per cent plummeting in value when forced to sell
hard-to-trade shares.
³I canıt recall a year thatıs got off to a worse start,² said Kenneth
Heinz,
president of HFR.
The HFRX index is not always a good measure of broader industry
performance
as it includes only funds which provide daily valuations. But recently it
has tracked closely the wider HFRI index. The HFRX is down 2.7 per cent so
far this year, compared with a worse-ever first quarter from the HFRI in
2001, when it fell just over 0.5 per cent.
Still, hedge funds have done better on average than equity markets, with
the
FTSE 100 UK blue-chip index having its worst first quarter since creation
in
1984, down 11.9 per cent.
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