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Turmoil in financial markets has inflicted significant damage on the investment performance of some of the biggest names in the hedge fund sector, with data showing DE Shaw and Goldman Sachs continuing to suffer losses, reports the FT on Friday.

On the whole, says Lex, in the overall context of market upheavals in the last decade, it hasn’t been a “particularly cruel summer” for many hedge funds - unless, of course, you’re Goldman Sachs, Bear Stearns or a number of others that have encountered difficulties.

“Performance may have suffered to the point where funds which have produced double-digit returns for the year to date now look like world-beaters, but there’s been nothing like the level of outflows that accompanied previous market wobbles in 1998, 2005 and 2006,” adds Lex.

The FT’s Anuj Gangahar, however, reports on some hedge fund investing strategies that have gone awry. DE Shaw, a pioneer of quantitative investing based on complex mathematical and computer techniques, has been hit hard in August, with its Valence fund down more than 22 per cent in the month to date, according to fund of hedge fund managers, he reports.

These investors estimate DE Shaw Composite, a multi-strategy fund, is down 7 per cent for the month. Fund of hedge fund managers reported other funds run by DE Shaw were prospering, however, showing that market volatility and uncertainty had benefited some strategies but hurt others.

Meanwhile, Goldman Sachs’ flagship Alpha fund was down 16 per cent so far this month, investors said. “But Goldman’s decision at the beginning of last week to bail out its global equity opportunities fund with a $3bn injection of capital looks to have paid off,” and the fund “rose 12 per cent in the five days after the announcement,” reports Gangahar.

Among the most striking winners has been New York-based AQR Capital, whose stock selection fund soared 22.1 per cent last week, according to investors. AQR was among the quant funds that suffered during July and early August.

The AQR, Goldman Sachs and DE Shaw funds are based on quantitative models.

Until now, such quant funds had been thought to be the main victims of the market turmoil rooted in the subprime mortgage crisis, says Gangahar.

Indeed, the Wall Street Journal reports on Friday, quant funds, that use statistical models to find winning trading strategies, can be their own worst enemies. Among those that reported heavy losses this month, some managers pointed their fingers at other quantitative hedge funds, essentially saying they all owned many of the same stocks and their models told them all to sell at the same time, driving down the share prices, hurting everyone in the process, notes the Journal.

In a letter to investors, according to the Journal, Jim Simons of the hedge fund Renaissance Technologies wrote that the quantitative funds behind the selling “undoubtedly share some signals in common with our own, and the result has been losses.”

Filings with the SEC show that as of the end of June, quant hedge funds often shared large positions in the same stocks. Renaissance held 1.1 per cent of the shares outstanding of NVR Inc, a Virginia construction and home-building company. AQR Capital Management, another quant fund, held 0.9 per cent of the company’s shares and quant fund Numeric Investors had a 1.6 per cent stake, reports the Journal.

But funds across other strategies “are also feeling the pinch,” notes the FT’s Gangahar, citing Hedge Fund Research of Chicago saying every fund strategy is in negative territory over August so far.

Prominent vehicles that have suffered include those run by Barclays Global Investors and GLG, says Gangahar. BGI’s 32 Capital Fund was down 7 per cent for the month to Monday last week. GLG’s European long-short fund, one of the company’s biggest hedge funds with more than $2bn in assets, fell 4.4 per cent in the first 10 days of August.Hennessee, the hedge fund consultant, said that while there were hedge fund failures related to the subprime crisis, many funds had expected such an event and were able to profit from the decline.

Lex, however, notes “anecdotal evidence” from fund managers that suggests “the pain of withdrawals has been limited to certain strategies such as managed futures, equity long/short and long fixed-income”. While investors in other types of funds are “asking plenty of questions”, they’re not taking any drastic action.

There are several reasons for this, notes Lex:
First, investors’ allocations to hedge funds tend to be more widely spread across a variety of managers these days, smoothing the impact of losses. For another, the influx of institutions such as pension funds and life companies has meant that investors, on balance, take a longer view, avoiding knee-jerk reactions. The slow-burning nature of the sub-prime fallout has also given managers time to mop investors’ brows - while steering expectations downward.
And if the industry’s resilience can be measured by banks’ willingness to lend to it, “then hedge funds have rarely looked more stable,” Lex adds: “Prime brokerages used to be the first port of call for credit departments whacking up rates in the event of market spasms. Currently, there’s little evidence of brokers raising margin calls across the board, or denying loans to those who want them.”

But it’s early days yet, concludes Lex: “A lot of decision-makers are still on the beach. And in many cases, funds have lock-ups and other provisions that prevent big redemptions until later in the year.” In the meantime, “the lack of a mass rush for the exits has at least bought some managers time to recover”.