Hedge funds show big losses in August

Hedge fund investors have grown used to huge returns. No longer.

Last month's market volatility has caused the $2.4 trillion industry to suffer its only losses of the year. Hedge funds collectively posted declines of about 1.3 percent in August, according to industry tracker Hedge Fund Research.

The deep-pocketed investors that infuse these funds with capital are now bracing for the most disappointing progress reports seen in years, with the risk of even worse to come in weeks ahead.

"For those that suffered from declines, it is still fairly early to provide any kind of concrete results," said Joel Schwab, managing director of Channel Capital Group, which tracks hedge fund performance. "The books may still be adjusted, numbers may still decline, and estimates could be revised downward."

Citigroup's flagship Old Lane Partners LP told investors in a letter sent out on the weekend that it suffered a 5.9 percent decline in August. Pirate Capital, the hedge fund managed by Thomas Hudson, told its backers that assets in two of its activist funds lost almost 80 percent of their value in the past year.
Hedge funds hit in August

More letters are expected as hedge funds - especially those that invest heavily in illiquid or high-risk assets like mortgage-backed securities - finish tabulating results for the month.

Hedge funds, which are typically privately run investment vehicles that attract wealthy individuals and institutions, were squeezed as stock markets were roiled this summer. Rising delinquencies on mortgages made to people with bad credit forced two hedge funds managed by Bear Stearns to file for bankruptcy earlier this summer.

A whole slew of others reported similar distress because they could not properly value their holdings, or because investors were rushing to get their money back in fear of a market collapse.

Financial institutions like Goldman Sachs, BNP Paribas, and UBS have all reported steep losses to their hedge funds in the past few months. Meanwhile, some dozen other investment managers were forced to shutter funds or suspend investor redemptions to stave off bankruptcy.

Investors in Old Lane's funds received a letter dated Sept. 7 that outlined the performance of its $4.4 billion worth of assets. The multistrategy fund focused on a mix of stocks, bonds and commodities.

The 5.9 percent August drop still left Old Lane with a 1.9 percent gain for 2007. That return trails the 6.2 percent advance made by the industry for the year to date, according to Hedge Fund Research.

Citigroup, the biggest U.S. bank, paid about $800 million for Old Lane in July. Though some criticized the deal as being too expensive, one big reason behind the takeover was that it brought on board a prized team of former Morgan Stanley executives led by Old Lane founder Vikram Pandit.

Meanwhile, Pirate Capital - whose founder Hudson was formerly a Goldman Sachs trader - said in a recent letter that investors could not withdraw money from its two Jolly Roger Activist funds. Those investors won't get access to their investments until the holdings of the funds are sold.

In a letter to investors obtained by the Associated Press, Hudson blamed prior redemptions and the effects of market turmoil as the reasons for the move. The activist hedge funds have investments in four companies, according to a Securities and Exchange Commission filing.

The Norwalk, Conn.-based hedge fund is known for acquiring stakes in companies and pushing management to pump up their lagging stock prices. Hudson is currently a board member with Brink's Co., and has been calling for it to split into two companies.

But, as investors wait for the next shoe to drop, there is some hope that August might have been the bottom for hedge funds. With the Federal Reserve expected to cut interest rates next week, there has been some optimism that the markets will soon begin to reverse course and become more favorable to investors - though that could take a number of months.

"There's been stabilization in the fixed income market, less volatility in equities, and credit spreads improved a bit," said Ken Heinz, president of Hedge Fund Research. "You may see a more stable environment moving forward."