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Bonds Are a 'Safe' Investment: A Big Lie Gets Even BiggerThe hedge fund sector lost 18.3% in 2008 -- the sector's worst year on record -- according to data compiled by Hedge Fund Research Inc., as funds found it difficult to adjust to the tumultuous trading and market conditions precipitated by the global financial crisis.
Losses, withdrawals take a toll
Further, losses and withdrawals decreased industry assets to $1.1 trillion in December 2008 from $1.9 trillion in June 2008, according to Bloomberg News, citing Morgan Stanley data.
Economist Richard Felson said investors can interpret the year for hedge funds in two ways.
"One way to look at it would be to say that hedge funds, despite their derivatives, sophisticated trading models, and ability to move money across markets with speed, were not immune to the financial crisis and market turmoil," Felson said. "That would be a data point to argue that the bloom is off the hedge fund rose."
"But another perspective could argue that although hedge funds had their worst year in a decade, a double-digit loss, they still fared much better than the broader market and, I would sense, than most investors who weren't able to invest in hedge funds," Felson said. The Dow lost 33.8% in 2008, the S&P lost 38.5%, the worst year for each since 1937.
Felson's verdict on the hedge fund sector, briefly? More data points, or years, are needed to assess the investment type, but he still recommends the sector for certain accredited investors. "Hedge funds still offer major, tactical advantages over, for example, mutual funds, but they're not for non-wealthy investors," Felson said.
Sector Analysis: One hedge fund category/type Felson would categorically avoid: funds-of-funds, due to their frequently extra layer of management fees and/or performance fees.
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