The financial turmoil in late 2008 wreaked havoc on hedge funds’ performance and their businesses. Although the industry’s assets under management soared in the first half of the year, peaking at nearly $2 trillion, they declined by a quarter in the second half of the year. An industry shakeout has ensued, with a record number of hedge funds closing. One fund manager we interviewed called this “the dot-com bust” for hedge funds. But just as the dot-com bust hardly spelled the end of Internet business, the challenges of the past 18 months will not cause the collapse of the hedge fund industry.

Negative returns account for two-thirds of the drop in assets
Poor hedge fund performance accounted for two-thirds of the decline in hedge fund assets under management in 2008 (see Fig. 1). The Hedge Fund Research Index, a broad measure of industry performance, fell 18% in 2008. Nearly all major hedge fund strategies – referred to by their shorthand names as equity hedge, event-driven, and relative value – posted negative returns. The one exception was the category known as macro strategies, which was up 7% for the year.



At the writing of this report, hedge funds are beginning to recover from the losses of 2008. Through the first quarter of 2009, aggregate industry returns were up 0.5%, and the best-performing strategy (relative value) generated gains of 4.7%. By the end of May, an index of hedge fund returns was up 9.4% for the year. Many individual funds, including some of the best known, have reported double-digit gains for the year to date.