The main purpose of hedge funds is to generate absolute returns. That is, even if the general market is down, hedge funds should still post positive returns as these vehicles have much leeway in terms of investment approaches, such as futures and short selling.
But this theory has been a bust. Many top hedge funds have sustained double-digit losses over the past few months.
As a result, investors are yanking their money from hedge funds. In fact, in October, the hedge fund asset base shrunk by 9% to $1.56 trillion according to Hedge Fund Research Inc. What's more, the average return for hedge funds in October was a grim -6%. For the year, the average loss is 16%.
The biggest losers -- in terms of lost assets -- have been the funds of hedge funds. Essentially, these are funds that invest in other funds. This means higher fees, and, unfortunately, it looks like this may also mean further reduced returns.
Keep in mind that hedge funds have posted losses for five consecutive months, which is a record. With continued volatility, the streak could stretch into November, leading to even more redemptions that will certainly continue to put pressure on the markets.
Tom Taulli is the author of various books, including The Complete M&A Handbook
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