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Hedge funds return to roots as alpha claim refuted

Reuters – Hedge funds are set to return to their roots as niche products for the happy few as they have been unable to deliver the gleaming returns they were promising ever since the start of the credit crisis.

Hedge fund managers have long been flaunting alpha — returns down to their skills to beat markets by using advanced investment techniques — but many were caught short just as any other investor in this year’s protracted downturn.

The industry now faces rapid shrinkage driven by losses of more than 20 percent, as measured by Hedge Fund Research’s daily HFRX index, and redemptions that are predicted at somewhere between "large" and "catastrophic."

"Eighty percent of the hedge fund sector will not be here in three to four months," Robert McAdie, a credit strategist at Barclays Capital, said at a recent briefing. "Levered strategies are dead in this environment."

Funds have delivered worst-ever losses of 17.70 percent in the 11 months to November, according to Hedge Fund Research, as stocks have slumped and volatility has surged.

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