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(Updated to add context on Paulson.)



) -- 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



report, hurt by holdings in

Bank of America

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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

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, 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.

His investors must inform him by the end of October if they want their money back by year-end but, for now, the requests have been in line with recent quarters, the story said, without citing its sources.

The Wall Street rumors cite his funds' sale of $100 million of Lehman Brothers debt at market levels several days ago as a sign of his need to raise cash. The debt has some value even though Lehman declared bankruptcy in 2008, fueling the nation's financial crisis.

Morningstar, which also tracks hedge funds, reports that the MSCI Europe Hedge Fund Index recorded some of the largest declines in August, 4.5% on average, but they held up significantly better than the MSCI Europe Index, which fell 10%.

Indicative of the hedge fund industry's woes in Europe, the London-based

Man Group

, the world's largest publicly traded hedge fund, saw its shares tumble as much as 22% today on the London Stock Exchange, after it reported that its assets fell by $6 billion since the end of June to $65 billion. Clients redeemed $2.6 billion, while poor investment performance wiped out $1.5 billion and shifting currency values took away almost $2 billion.

Hedge fund performances and asset flows have swung wildly as well. Man Group, for example, reported record fund sales of $9 billion in the three months to June 30 and a quarterly net inflow, and said it expected to report a $145 million pretax profit for the period, although that was below analysts' expectations.

Another U.K.-based hedge fund,

Aberdeen Asset Management

, said Monday that its assets shrank by 4.8% in the two months to Aug. 31, due to investor redemptions and fund losses.

Relative-value strategies, including arbitrage, performed comparatively well in August, as these strategies help hedge equity market risk, Morningstar said.

The hedge fund industry saw an estimated $4.8 billion in inflows in August, bringing total industry assets to an estimated $1.8 trillion, according to Dow Jones Credit Suisse., another industry tracker, reports that hedge funds' best performers in August were their commodity exposures, primarily precious metals and grains, along with short equity exposures, while their fixed-income strategies outperformed equity allocations, which on average were losers.

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