2008 A Tough Year For Hedge Funds

The U.S. economic downturn has spread to hedge funds, according to survey results that show slowing growth in assets at the exotic investment vehicles.

Hedge fund assets grew by 4.3 percent from January through June, the smallest growth for any six-month period in the six years that the magazine Absolute Return has been tracking such data.

The latest period's performance fell short of the previous low of 10 percent asset growth in the second half of last year, according to the New York-based monthly, published by the firm HedgeFund Intelligence. In the first half of last year, growth was 23 percent.

The latest twice-a-year survey, released Monday, is based on figures from 268 hedge fund firms managing at least $1 billion apiece. Those firms managed combined assets of nearly $1.68 trillion as of July 1. In cases where a fund did not disclose assets, Absolute Return relied on other sources to make estimates.

Since January, 35 percent of the firms have lost assets, because of falling investment performance amid recent market declines, and more investors taking money out of funds than putting money in.

"It has been a tough year for just about everyone, except the few who correctly anticipated that the financial crisis would continue to deepen - and thus bet that financial stocks would continue to fall and that the credit markets would fail to recover," said Michelle Celarier, Absolute Return's editor.

Although Celarier said hedge funds outperformed credit and stock markets in the year's first six months, the list of shrinking hedge funds from January through June included several big funds.

Of the 10 top firms, those with the biggest decline in assets include sixth-ranked Farallon Capital Management, which fell by about 8 percent; Renaissance Technologies, with a nearly 15 percent decline; and Goldman Sachs Asset Management, with a nearly 8 percent decline.

The 10 largest firms controlled nearly $337 billion in combined assets as of July 1, compared with $320 billion in January and $309 billion in July 2007.

JPMorgan Asset Management was the largest fund, with $48.1 billion, an increase of nearly 8 percent from January. Bridgewater Associates came in second with $43.5 billion, an increase of nearly 21 percent.

D.E. Shaw Group jumped to third from sixth place, with $37.1 billion, and Paulson & Co, with $34.9 billion, jumped to fourth place from eighth place in January. Och-Ziff Capital Management remained at fifth place, with $33.3 billion.

Harbinger Capital Partners, with $24 billion and a nearly 34 percent increase in assets, joined the top ten firms for the first time.

Hedge funds are vast pools of capital that operate secretively and with little government supervision, and traditionally cater to institutional investors and very wealthy individuals. Hedge funds have grown explosively in recent years, luring an increasing number of ordinary investors, pension funds and university endowments.

Hedge funds can invest in nearly anything: commodities, real estate, complex derivative securities as well as ordinary stocks, assets of companies. Unlike government-regulated mutual funds - the primary vehicle for retirement savings for tens of millions of Americans - hedge funds can use techniques such as short-selling, or betting on falling stocks or markets to make a profit from downturns.