HEDGE fund managers who fail to hedge were blamed yesterday for a prolonged bad patch for the industry that has now stretched into its fifth month.

Hedge funds have increasingly been placing directional bets on rising share prices and were badly caught out when equity markets dived in May and June.

Some then compounded the error by losing their nerve and failing to position themselves for the bounce in equities that duly occurred in July.

John Godden, chief executive of IGS Group, which advises on hedge fund investment, said: “It seems that a lot of hedge funds have played the directional ticket and that has backfired.”

Mr Godden was responding to new provisional figures from MSCI Barra, the index compilers, which showed that hedge funds open to new business have lost their investors money for 4½ months.

Few hedge funds are entirely market-neutral, with most in effect preferring share prices to rise rather than fall. But the share market recovery of the past three years has persuaded more and more to bet “long” and fewer and fewer to take compensating “short” positions.

According to Mr Godden, “There are increasing numbers of benchmark-huggers.”

The MSCI Hedge Invest Index, which measures returns from 130 hedge funds still open for new business, fell by 0.8 per cent in the three months to June, by 0.08 per cent in July and by 0.14 per cent in the two weeks to August 15.

The more widely based MSCI Composite Index, which tracks about 1,300 hedge funds, most of which are closed to new clients, posted a second-quarter return of just 0.1 per cent, compared with 5.4 per cent in the first quarter.

By geography, hedge funds investing in Japan and the Far East were worst-hit in the quarter, while those invested in North America were the most resilient. By asset class, hedge funds invested in equities or their derivatives did poorly, losing 1 per cent in the second quarter, while those taking positions in the bond markets did much better. MSCI has no separate category for commodities, where, anecdotally, hedge funds also made losses.

Strong first-quarter performance figures helped to stimulate strong inflows into hedge funds. Most new investors this year have done badly.

Hedge funds is the broad term for investment vehicles taking positions in a wide variety of assets. Their common characteristics are that they tend to be unregulated, highly geared and market themselves as making money for their clients regardless of the direction of conventional markets.

Billions of pounds of fresh investment has been directed to hedge funds by wealthy individuals and, more recently, by pension funds. That has sparked a flood of new entrants to the industry. There are estimated to be 9,000 individual hedge funds and 1,700 funds of hedge funds.

Times Recommends

• Minister in talks with Saudis to protect creditors
• Premier Inn hits back in £29-a-room row
• Bankers hit back at 'populist' bonus supertax