Hedge funds see $159-bn outflows in Oct-Dec period

Spooked by increasing performance losses and record investor redemptions, the global hedge fund industry saw net outflows worth $158.91 billion in the fourth quarter of calendar year 2008, the highest level since 1994.

According to a report by fund tracking firm Lipper, global hedge fund assets are estimated to have decreased from $1.5 trillion in September to $1.29 trillion at the end of December 2008.

All hedge fund sub-strategies posted negative money flows (outflows) in the three-month period with cumulative net outflows in 2008 as the industry witnessed a collapse in global equity markets, liquidity issues and failure of a number of key institutions.

In absolute terms, the performance of Credit Suisse/Tremont hedge fund index in Q4 2008 registered -10.21 per cent, the second worst quarterly performance since the start of the index. The index had posted 10.33 per cent negative returns during the third quarter. "A majority of hedge fund managers were hit by panic selling and deleveraging that followed, combined with changes in broker requirements and the enforcement of a ban on short selling in certain financial stocks," said the Lipper report.

In US dollar terms, the largest hedge fund sub-strategy outflows were experienced by long/short equity at $42.52 billion.

"The fourth quarter was the worst – that undermined investors' confidence. It deteriorated also because of the Madoff scandal that occurred in December, marking a start of crisis in real sector of the economy," said Aureliano Gentilini, global head of hedge fund research at Lipper.

Managed futures funds saw outflows worth $23.95 billion followed by event-driven withdrawals, resulting in redemptions worth $22.27 billion. The multi-strategy category saw outflows of $16.64 billion. Combined outflows across these strategies amounted to $105.39 billion or 72 per cent of the overall money flows in the quarter.

Of the four sub-strategies posting largest negative outflows in the fourth quarter, only managed futures recorded positive inflows of $1.34 billion for the third quarter of 2008.

The weakest performance by hedge funds in a decade has come at a time when US politicians and regulators are clamouring for tougher regulations governing hedge funds.

Investment boards for pension and endowments which invest in these funds are asking hedge fund managers to lower their fees, provide more clarity on redemption rules and make other changes.