On the face of it, the August performance numbers for hedge funds are relatively reassuring. Sure, it has been a torrid month, with a number of funds folding and the vast majority posting losses. Nineteen out of 20 hedge fund strategies turned out to be lossmaking, according to index-compilers HFR.

But it could have been much worse. The liquidity crunch made many funds forced sellers of assets as banks and prime brokers called in debt or made margin calls. Spreads in virtually all asset classes have widened, worsening marked-to-market losses.

Hedge fund investors nursing losses of 2, 3 or 4 per cent on the month may well regard the performance as resilient, given the extraordinary events of the summer.

But that is too sanguine a verdict. First, most hedge funds have billed themselves as absolute return vehicles, able to produce positive returns regardless of market storms. The boast that their investments were uncorrellated with bond, equity or any other markets – the main selling point for pension fund trustees seeking diversification – begins to sound hollow.

Secondly, events of the past few weeks have hardened the suspicion that many hedge fund managers have in essence waxed fat on theI far-from-brilliant wheeze of borrowing cheaply and chasing apparent yield – be it through the yen-carry trade or through sub-prime mortgage-backed securities. The suspicion is growing that some hedge fund managers, far from pursuing independently thought-out strategies, are as herd-like as any sheep blindly following the bleat in front.

Thirdly, the anxiety is far from over in some corners of the financial markets and may become as overdone as the excessive confidence exhibited just a few months ago. If that is the case, hedge funds may have to brace for the trickle of redemption requests already experienced over the summer to become a flood. Most have a bit of a cushion. Investors have to give notice of anything from 60 days to a year to get their money out. A wholesale rush for the exit would be ugly, forcing funds to liquidate positions and offload assets at fire sale prices. Those following copycat strategies could be badly scarred by the inevitable adverse price movements. podcasts The pain meted out to quantitative or “black box” funds last month could be a taste of things to come. Meanwhile, the plentiful and cheap supply of credit, on which many relied, has gone for good.

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