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Hedge Funds' Year of Investing Dangerously

BOSTON (TheStreet) -- Hedge-fund managers, who get rich by skimming off a fifth of their clients' investment gains, are posting larger losses than the average American after their risky bets proved to be the wrong choices during last week's stock-market crash.

This year is turning out to be almost as bad as 2008 for hedge-fund managers, with inflows slowing at a "torrid pace," according to the latest fund flow data from research firm TrimTabs. After raking in more than $67 billion in the first several months of the year, the hedge fund industry pulled in only $1.8 billion in June and July, according to the report.

John Paulson (Paulson & Co.)

Performance, for which investors pay a premium over traditional mutual funds, has been underwhelming this year. The Barclay Hedge Fund Index was up 1.1% through July, trailing a 2.8% rise in the S&P 500. August has so far witnessed a bloodbath for equity prices, with the S&P 500 falling more than 8%, and leverage hedge funds expected to perform as badly, if not worse.

Many comparisons are being drawn between this month's selloff and the market collapse in late 2008. Hedge funds are already seeing an eerie increase in blow-ups. Hedge Fund Research estimated that by the end of the first quarter, 684 funds liquidated in the previous 12 months, resulting in the highest net increase since 2007.

Hedge funds, which tend to take on more risk than mutual fund managers, have seen their strategies undermined by unforeseen circumstances, from the earthquake and tsunami in Japan in March to the growing debt crisis in Europe and the downgrade of U.S. debt by Standard & Poor's Aug. 5. Several media reports have hedge fund manager John Paulson's Advantage Plus Fund down 31% this year as of Wednesday.

"Absent a reversal of fortune, many mangers will not collect performance fees for the fourth straight year," TrimTabs analysts write in the latest flow report. Most hedge funds charge a 2% management fee and take 20% of clients' investment profits. Most mutual funds charge only management fees amounting to less than 1% of assets.

Prior to May and June, hedge funds had not seen two losing months in a row since the financial crisis, HedgeFund.net notes. "The European debt crisis has likely resulted in lowered exposures to risky assets and losses in May and June were the result of this de-leveraging," the firm notes.

Hedge fund performance will be scrutinized more closely as today is the deadline for managers to report holdings to the Securities and Exchange Commission for the second quarter. Hedge funds that manage more than $100 million are required to disclose their equity holdings, options and convertible debt on a Form 13F filed to the SEC within 45 days of the end of a quarter. These filings can give individual investors a roadmap for where the so-called smart money is flowing.

Although investors will have to wait for the full filings to find out what some of the largest and most prominent hedge fund managers bought and sold during the second quarter, TheStreet has combed through SEC filings and investor letters to get a peek at what the full 13F filings will show. From Paulson and Soros to Ackman and Einhorn, their known moves are detailed on the following pages.

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