More Than 80 Percent of Hedge Funds Underwater
The selloff in most of the global markets in the third quarter heavily impacted a large number of hedge funds. Not only did it put many funds into the red for the year, it pushed a huge number of hedge funds below their high water mark.
By Stephen Taub
The selloff in most of the global markets in the third quarter
heavily impacted a large number of hedge funds.
In fact, not only did it put many funds into the red for the
year, it pushed a huge number of hedge funds below their high
According to HFR, at the end of the third quarter just 19.3
percent of all hedge funds were above that critical level that
determines whether their investors accounts are in the
black. This is way down from 44.2 percent at the end of the
second quarter and less than half the level of each of the
three prior quarters.
In fact, the 19.3 percent is the lowest level since the end of
the first quarter of 2009, when it bottomed at 18.7 percent, by
far the all-time low since HFR began keeping score in 2003.
But even the 19.3 percent figure could be overstating how the
average investor in those funds is faring in general. While
those invested in these underwater funds for many years before
the current slide could still be in the black, many hedge funds
with good long-term records traditionally gather the biggest
chunk of their assets after their big run-up.
So, this means many of them made their initial investments at
or near that recent high water mark.
A good example are the large number of investors who gave money
to John Paulsons funds after the managers
gargantuan gains in his reputation-making 2007.
The 80 percent or so of funds that are currently in the red
probably explains another interesting statistic trotted out by
While hedge funds altogether experienced net inflows of $8.7
billion in the third quarter--the ninth consecutive quarter in
which the industry has experienced net inflowsHFR
estimates just 39 percent of all funds were recipients of net
new money. The rest61 percentexperienced
This is exactly reverse from the prior quarter, when 61 percent
of funds received new capital from investors. This reversal of
fortune possibly suggests investors have become more
discriminating. On the other hand, they also may be chasing
performance, a historically foolish strategy frequently
repeated by investors.
Still, in the nine quarters that HFR has been estimating this
statistic over the last two years, typically 60 percent to 70
percent of all hedge funds experience inflows and the rest
outflows. (see table below).
|| Q2 2011
|| Q2 2010
|| Q1 2010
Percentage of estimated number of funds. Source:
Altogether, performance declines in the third quarter pushed
total industry assets under management below the $2 trillion
mark, to $1.97 trillion.
However, given the net inflows for the quarter, many investors
still dont seem to mind that a large number of
hedge funds are not delivering.