BOSTON (TheStreet) -- Hedge funds, now mostly in capital-preservation mode, tumbled last month, underscoring the view that there's nowhere for investors to hide as the U.S. economy crumbles and Europe's woes deepen.Hedge funds, which manage money on behalf of wealthy investors and institutions such as pension funds, fell 4.2% in September, bringing losses for the year at the end of the third quarter to 7.8%, according to the Dow Jones Credit Suisse Hedge Fund Index. The benchmark S&P 500 Index, in comparison, declined 14.3% through the end of the third quarter, with half that coming in September.
That index tracks 9,000 funds with assets of at least $50 million. Despite their losing performances, investors have continued to put money into hedge funds, including $6 billion in August, based on data from the 2,762 funds tracked by TrimTabs Investment Research, which is the latest such data available. July, when investors yanked $9.3 billion out of hedge funds, was the only month this year that hedge fund saw outflows, and they have had inflows in 16 of the past 19 months, TrimTabs said. TrimTabs analyst Leon Mirochnik told TheStreet that institutional investors, including pension funds and endowments, are continuing to use hedge funds as a means to diversify their portfolios, since have little correlation to the equities markets and because they offer better relative returns. For the year through the end of August, hedge funds saw inflows of $51 billion, about on par to the $52 billion they saw for all of 2010, he said. "They are struggling with underperformance, but investors are still giving them money, so hedge funds could be a bullish indicator for the markets, since they have a lot of money to invest," Mirochnik said. Net assets of hedge funds, at just under $2 trillion, are flat to the start of the year, he said. That statistic is influenced by investor fund flows as well as investment performance. Roughly 60% of hedge fund investors are institutional funds, and they are also used by financial advisers as alternative investment vehicles for retail or wealthy clients. Multi-strategy funds, which allow managers wide latitude in their investment choices, gathered the most, at $2.1 billion, followed by fixed-income-focused funds at $840 million, HFR said. The best-performing hedge fund strategy this year has been for those in the private issues category, which is up 7.8% to Sept. 30, followed by the short-bias index category, up 6.7%, HFR said. The worst performance was by the energy/basic materials sector, which lost 15.5%. Given that it appears that some hedge funds are now looking at probable double-digit losses for the year, some of their managers are going to see a down year for their personal earnings. They typically collect a performance fee of 20% of the fund's profits during any year on top of a management fee of 1% to 2% of assets.
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