Hedge funds had their worst month ever in September, and ultra-wealthy investors who fueled a doubling in hedge-fund industry assets to about $1.9 trillion in the last three years are now pulling their money out in fear of hedge-fund failures.
"Friends in that community say that by year-end, you'll see the number of firms in the hedge-fund area shrink, I've heard as large as 30 percent," John Mack, Morgan Stanley's chief executive, told CNBC.
According to Bloomberg.com, Morgan Stanley's prime brokerage unit lost clients last month after the bankruptcy of Lehman Brothers Holdings sparked a global bank crisis. Since then, it's regained some customers since completing a $9 billion investment from Mitsubishi UFJ Financial Group, giving Morgan a much-needed capital infusion.
But other hedge funds haven't been as fortunate.
According to Bloomberg, Highland Capital Management LP plans to close its flagship Highland Crusader Fund and the Highland Credit Strategies Fund after losses on high-yield, high-risk loans, and other types of debt.
Highland will end up with two funds in the next three years with more than $1.5 billion of assets.
Citadel Investment Group LLC, one of the world's largest hedge funds with about $18 billion of assets, told Reuters that September was the worst month in the history of the company.
Its main fund, the $10-billion Kensington Global Strategies, is down approximately 22 percent for the year.
In a letter to investors, Citadel Chief Executive Ken Griffin said Citadel's performance reflected extraordinary market conditions he did not fully anticipate, combined with regulatory changes "driven more by populism than policy," referring to the SEC's temporary ban of short-selling.
He wrote that, "Regretfully, I did not foresee the financial disaster that was to unfold in September."
Data from Hedge Fund Research (HFR)show hedge funds' losses grew in September when the average portfolio plunged 4.68 percent. That made September the industry's worst monthly performance. Investors withdrew a record $43 billion from hedge funds that month.
The average hedge fund now has lost 9.41 percent this year.
HFR's latest report shows the biggest losers in September were hedge funds that focused on energy and basic materials. They lost 13.21 percent just in September, and so far more than 20 percent for the year.
Kenneth Heinz, president of HFR, told CNN that, "Investors in the current market conditions are eagerly looking to rush to cash. They're so distraught by performance losses, not only by hedge funds, but wherever you are in financial markets."
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