Hedge fund investors, including some "funds-of-funds" that buy for pension funds and wealthy individuals, are demanding their money, and forcing hedge-fund managers to sell securities to raise cash and sending fund returns south.
A Hedge Fund Research Fund survey of the largest U.S. hedge-fund firms showed 35 percent of them have lost assets in the first half of 2008, putting the growth rate at 4.34 percent. That's the lowest in six years.
"A lot of institutions and veteran investors in hedge funds aren't making massive redemptions, but newer investors into funds are more concerned because of some of the losses this year," Robert Discolo, head of hedge-fund strategies at AIG Investments, told The Wall Street Journal.
"And it looks like high-net-worth clients are a little more impatient and are pulling out."
Ironically, the more investors a hedge fund attracts, the more portfolio management worsens because investors, not professional portfolio managers, are calling the shots.
The situation is made worse when nervous investors, many of whom may have borrowed some of the money they've invested,want to be the first to cash out before the fund sells its holdings to pay redemption demands, which pushes down prices.
Some fund-of-funds withdraw money when the investors they represent want to get their money out despite solid performance from the hedge funds in question.
For 2008, for example, a fund-of-funds run by RCG Capital Advisors in Boulder, Colo., was up about 1 percent through the end of August, compared with a 13 percent decline in the S&P 500.
Hedge funds overall lost slightly more than 3 percent through July, compared with a drop of more than 12 percent for the stock market in the same period.
The decline is only the second time hedge funds lost investors' money in the first half of a year since HFR began tracking data on the industry in 1990.
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