Hedge funds suffered one of their worst performances last month since the collapse of Long Term Capital Management in 1998, data from Hedge Fund Research (HFR) show.

Of the 20 daily hedge fund indices tracked by HFR, only one managed a positive result in August with the other 19 showing a negative performance.

One fund index – the Macro index – lost more than 8 per cent of its value during the four-week period.

The uniformity of the losses across much of the industry raised questions over the role of hedge funds, which market themselves as alternatives to traditional equity investment in return for large fees. Hedge fund managers have traditionally been seen as traders able to avoid the bumps of turbulent markets and capitalise on volatility.

The publication of HFR’s statistics coincided with a London-based commodities hedge fund manager admitting that it had closed two of its three funds because of “poor performance”.

Global Advisors, which specialises in energy and metals investments, had previously managed $140 million of assets, but said that now it would close two funds worth $65 million. It pledged to return money to investors by September 30.

Closure of the two commodity hedge funds raises concern that the global credit crisis, initially triggered by America’s sub-prime mortgage debacle, has spread not only to equity and debt markets but also to commodities.

According to HFR’s data, the Global Hedge Fund Index – which includes a variety of strategy funds including long/short – lost 2.55 per cent of its value. Long/short funds pick cheap stock to buy and dear stocks to sell.

One hedge fund insider said: “Much of the money invested in hedge funds goes into long/short. These guys are pretty similar to conventional long-only managers. The main thing that distinguishes them is the outrageous fee they charge.”

However, Lawrence Staden, who manages $600 million at the Covent Garden-based hedge fund manager GLC, said: “I mean, don’t get me wrong – our fees are just as outrageous as the next man’s – but well, we did make 13 per cent in August.”

GLC is one of the few hedge funds that recorded a significant positive performance in August. IKOS, which runs $3 billion in quantitative strategies, was also up on the month. Martin Coward, of IKOS, said: “Our equity products were up by between 3 and 6 per cent in August, confirming that our strategy is very different from the value-based techniques used by many long/short funds.”

Nick Hannan, of Oakley Capital, a fund of funds, which outperformed its peer group in August through exposure to funds such as GLC, said: “Institutional investors are used to conventional long-only funds, and long/ short is very similar. When they invest directly in hedge funds, they tend to opt for things not too far out of their comfort zone but we try to supply them with exposure to something a bit different.”

Another hedge fund manager said: “A lot of these long/short funds have spent the last five years buying up a particular line of stock, pushing prices higher, which in turn make their performance look better. In August you got a flavour of what would happen if they ever had to sell those stocks.”

Equity markets in August experienced their most volatile period since the invasion of Iraq in March 2003. The trigger was a crisis in the US mortgage market involving a surge in sub-prime home-loan defaults. Those mortgages were in turn packaged and sold on to banks, hedge funds and traditional fund managers. When some of the original borrowers defaulted, the value of the subsequent investments sank and banks became reluctant to lend to each other. As credit lines began to dry up, a number of mergers and acquisitions were either delayed or scrapped and equity markets in America, Europe and the Far East tumbled.

In the run-up to the market turmoil, investors were pouring $41 billion into hedge funds during the second quarter of the year, according to data from the fund tracker Lipper Tass. That inflow of funds, the second-biggest in any quarter since 1994, swelled the industry’s assets to $1.67 trillion at the end of June. The biggest inflows, according to Lipper, were for long-short equity strategies, which gained $14.9 billion.

Separately, City investment banks and hedge funds are understood to be tapping investors for money to create new funds to pick up debt being sold at low prices.

Loads of money

$1.75 trillion estimated value of assets held by hedge funds

$400 billion estimated value of assets held by hedge funds in 1990

30% of hedge funds do not survive for more than three years

90% of funds were adequately capitalised at the time of closing

Source: Federal Bank of New York

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