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Hedge Funds, Especially Paulson's, Fail Investors This Year

(Updated to add context on Paulson.)

BOSTON (TheStreet) -- The average hedge fund manager, who charges a 2% annual management fee and keeps 20% of any investment gains, is struggling to keep up with an idiot box known as an index mutual fund.

Hedge funds, on average, lost 2.3% of their value in August, bringing their performance this year to dead even. The S&P 500 Index, the benchmark for U.S. diversified mutual funds that's also a popular index fund and an exchange traded fund, fell 5.4% last month, producing a decline of 1.8% for the year.

And some fund managers, including renowned contrarian John Paulson, would be delighted with those returns, as the third quarter is turning into a hell hole for them.

Paulson's Advantage Plus hedge fund has lost 34% this year, according to an HSBC (HBC) report, hurt by holdings in Bank of America (BAC), Citigroup (C), Hewlett-Packard (HPQ) and, most recently, gold. Paulson became a star manager by going all-in on a bet against the housing market three years ago, earning him a reported $5 billion in one calendar year.

>>View John Paulson's Portfolio

Goldman Sachs (GS), Wall Street's most profitable investment bank, this month told investors it plans to close its Global Alpha hedge fund, the crown jewel of its so-called quantitative trading strategy, because of poor performance.

Only three of 10 hedge fund strategies posted positive performances in August. The most winning strategy this year is global macro, which gained 5.9% this year through August. The biggest loser was the multi-strategy category fund, which lost 6.8%. The performance data comes from the Dow Jones Credit Suisse Hedge Fund Index, which tracks about 9,000 hedge funds with assets of $50 million or more.

Hedge funds performances have been volatile this year, a reflection of the world's economic uncertainties. For example, the Dow Jones Credit Suisse Hedge Fund Index gained 0.7% in July, with six of 10 sectors posting positive performances, but that was followed by the August decline. At mid-year, the index had posted a gain of 1.7%.

Other hedge fund managers are reportedly circling Paulson's portfolio like vultures, looking to pick off troubled assets in anticipation that he might have to sell some quickly in order to raise cash to meet redemptions, according to a Wall Street Journal article today.

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