August appears to have been the worst month for hedge funds since May 2006, when 70% of all hedge funds fell. The first two weeks of the month saw continued woes in subprime mortgage securities, and many long/short market neutral quant funds began to unexpectedly see their long positions fall, and their shorts rise precipitously.
These leveraged hedge funds had to unwind their positions in order to de-leverage, by buying back the short positions and selling the long positions, to varying degrees, which just drove prices the opposite way of how they need to perform and increased volatility.
Most hedge fund managers took their lumps in the unwinding process, but others like Goldman Sachs decided to de-leverage by increasing the denominator of their fund through offering fee incentives for new shareholder investments, effectively reducing leverage by increasing the net asset base.
Industry sources cited the $6 billion Tudor BVI Global Fund falling 5.5% in August, the $6 billion Raptor Fund falling 5.6%, Caxton’s $11 billion flagship fund off 4.8%, Moore’s $7 billion Global Fund off 5.7%, and New York-based Third Point off 8%, just to name a few.
Those who had to sell were hurt badly, while those were able to weather the storm saw these strategies rebound off of their lows to finish flat or up slightly for the month. The unknown is the extent of redemption requests hedge funds have received for September 30th. A slew of funds may now be forced to liquidate significant positions sometime this month to meet that demand.