Hedge funds wither under crisis strain

Upwards of 25 per cent of hedge funds have suspended redemptions, imposed gate provisions or implemented side pockets, according to the lat est review of fund of hedge funds by ratings house Lonsec.

The Lonsec review, pro vided to Money Management, has revealed a sector experiencing substantial turmoil as it tries to adapt to the global financial crisis, with the result that of the nine funds reviewed, none were rated above ‘recommended’. Seven were awarded Lonsec’s ‘recommended’ rating and two were rated as ‘investment grade’.

The Goldman Sachs JBWere Multi-Strategy Fund was downgraded to ‘investment grade’, while the HFA Diversified Investment Fund was downgraded to ‘recommended’.

Two funds were added to Lonsec’s recommended list — the Fauchier Partners Absolute Return Trust and the Man RMF Dynamic fund. The UBS AIS Global Alpha Strate gies Fund and the Credit Suisse/Tremont Index Strategies Fund were closed and wound up.

And despite the broadly negative publicity that has surrounded the hedge fund sector, the Lonsec analysis makes clear that despite the significant losses, the broad hedge fund index actually per formed better than the broad equity indices, and at lower levels of volatility.

It said the Credit Suisse/Tremont Hedge Fund Index returned minus 19.1 per cent for the period, compared to the MSCI World index, which returned minus 42 per cent.

However, the Lonsec analysis also pointed to the inevitable consolidation of the hedge fund sec tor, saying that while it was estimated to be val ued at over $2 trillion 12 months ago, it is now valued at around $1.5 trillion following client redemptions and significant drawdowns.

“The rate of hedge fund closures has increased, with the prospect of little if any performance fees in the next year or so, leading some hedge fund man agers to decide to call it quits,” the analysis said.

It said other hedge fund managers had been forced to close having failed to meet margin requirements.

“It is worth noting that Australia is one of the only jurisdictions in the world where hedge funds are offered to retail investors, however difficulties in gaining traction in the retail space has contributed at least in part to the closure of a number of fund of hedge funds,” the analysis said.

Of the Lonsec-assessed funds to close, both had failed to gain sufficient traction in the Australian market.

The newest fund on Lonsec’s recommended list, Man RMF Dynamic, was launched less than a year ago and is yet to see money in its Australian vehicle.

The Australian market is currently dominated by two large players, BT ($881 million) and HFA ($612 million).