Nearly three-quarters of funds post losses in grisly month

August’s turmoil pushed more than two-thirds of hedge funds into the red.


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August was a record-breaking month for hedge funds but not in any positive way. The market tumult that month led to losses across a broad swath of hedge fund strategies, knocking 70.45% of the funds in the AR database into negative territory. That is the third-highest proportion of losing funds to winning funds for a given month since AR began recording fund performance in 1998. During the worst month in the history of the database, September 2008, 74.28% of funds lost money.

In August, the AR Composite Index dropped 1.74%, bringing it down to a gain of just 0.42% for the year, the lowest return for that time of the year since 1998 (when the index was down 2.51% following the Russian debt default). At this point in 2010, the index was up 2.56%, on its way to a 9.05% gain for the year.

Despite losses, hedge funds did outperform the Standard & Poor’s 500 index, which dropped 5.7% in August (and not a single U.S. subindex of the S&P 500 was up for the month). Commodities funds were the best-performing strategy, gaining 0.39%. Of the 16 AR indices, 13 lost money. Along with commodities, winners included macro and managed futures funds, which rose 0.38% and 0.29%, respectively.

While most strategies proved unable to handle the wild market gyrations in August stemming from the European debt crisis and the U.S. debt downgrade, some fared much worse than others. Event-driven funds fell the hardest, losing 4.42% as market volatility forestalled deal making. It was the third-worst month for event-driven funds since 1998, beating only September and October 2008, when the AR Event Driven Index posted consecutive losses of 8.65% and 7.18%.

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Some of the largest names produced the largest losses. The Paulson Advantage Plus Fund, felled by founder John Paulson’s long bets on the struggling U.S. financial sector, collapsed 15.22%, its steepest drop ever, leaving it down 34.16% for the year. For funds that have long bet on volatility, however, August was a treat. The $1.6 billion Balestra Capital Partners fund rode its macro strategy to an 8.71% return for the month, leaving it up 3.16% for the year.

U.S. Poor John Paulson Balestra Capital Partners
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