Hedge Funds Lose 0.78% in August

Hedge funds recorded their weakest August performance in over a decade, declining 1.31% according to Hedge Fund Research Inc., representing the first negative monthly return since July 2006. This downturn occurred amid volatility triggered by deteriorating conditions in the subprime mortgage sector and broader market stress. Alternative measurement sources showed varying results, with Lipper's Hedge Fund Composite Index reporting a more modest 0.20% decline for August, though this still contributed to a year-to-date loss of 1.40%.

Strategy-specific performance revealed significant divergence across the hedge fund landscape. Emerging Markets represented the weakest performing category despite isolated strength in China-focused strategies. Latin America and Russia/Eastern Europe funds posted particularly severe declines of 2.93% and 3.89% respectively. Fixed Income strategies also deteriorated, with Fixed Income: Diversified falling 1.55% and Fixed Income: High Yield declining 1.97%. Macro strategies dropped 2.18%, driven by weakness in Commodity Trading Adviser strategies and discretionary macro implementations.

A notable bright spot emerged in Short Selling strategies, which gained 1.29% in August to mark their third consecutive month of positive returns. This performance capped an approximately 11% cumulative three-month gain, reversing a concerning streak of ten consecutive months of losses that had weighed on the strategy throughout 2019.

Despite August's performance challenges, the hedge fund industry demonstrated underlying resilience with continued capital inflows. Industry assets under management increased by $16.8 billion at the end of July, reaching a record $1.76 trillion. HFR President Ken Heinz noted that while increased volatility during August was associated with subprime mortgage market collapse, quantifying the precise impact of mortgage exposures on fund performance remained difficult due to the complexity of underlying risk factors.