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Hedge Fund Assets Decline by Biggest Amount Since Financial Crisis

For years, the hedge fund industry attracted billions of dollars as investors searched for higher returns. But over several rocky months, managers reversed their gains for the year, investors headed for the exit and some firms shut down.

Over all, the total amount of money that hedge fund managers have available to invest in stocks, bonds, commodities and currencies shrank by $95 billion in the third quarter of the year, according to data from HFR, a firm that tracks the industry. It is the biggest decline in assets since the third quarter of 2008 in the depths of the financial crisis.

Investors have been left with steep losses after months of global market volatility set off by a series of unexpected moves by central banks around the world, political turmoil in Greece, a debt default in Puerto Rico and a market rout in China. The turbulence has been unkind to every type of strategy deployed by hedge fund managers, from investing in distressed companies to buying equities.

While the headlines have been dramatic, market turbulence so far this year has not reached the same level as late 2008, when Lehman Brothers collapsed, the last time the industry experienced such a big decline. This has prompted some criticism that hedge funds, which were originally meant to protect investors from huge swings in the market, are not doing their job.

The biggest names in the hedge fund industry have seen their gains for the year reversed. William A. Ackman’s Pershing Square Capital Management has lost 9.4 percent so far this year, while Marcato International, a hedge fund run by Mick McGuire, a protégé of Mr. Ackman, has lost 11.6 percent. Hedge fund managers who have gained sterling records in recent years are suffering, including Larry Robbins of Glenview Capital Management, who is down 13.5 percent.

Among the worst-hit hedge fund managers are those who took large concentrated bets in the same stocks, so-called hedge fund hotels. Nine of the most popular stocks owned by hedge funds, including Valeant and Cheniere Energy, lost more than 20 percent over the quarter, according to research by Novus.

September was particularly difficult for many of these stocks.

“Hedge funds are reeling from a relentless rout that has all but killed a year’s worth of alpha in a matter of two weeks,” said Stan Altshuller, chief research officer at Novus, a research firm.

As the disappointing performance numbers continue to roll in, the list of funds that have been hit by investor requests to withdraw their money has grown. Claren Road Asset Management, a hedge fund majority-owned by the private equity firm Carlyle Group, told investors in August that it had received requests from investors to withdraw $2 billion from the fund.

The list of hedge funds that are winding down has grown, too.

Faced with similar redemption requests, another private equity firm, Bain Capital, told investors earlier this month that it would wind down its multibillion dollar Absolute Return Capital hedge fund after three years of losses. And the Fortress Investment Group said last week that it would shut down its $2 billion flagship fund because of an environment not “conducive to achieving our best results.” It lost investors 17 percent this year.

Smaller, less-known hedge funds have been caught out, too. One fund called Spruce Alpha, which used a risky leveraged exchange-traded fund strategy, lost its investors nearly half of their money over one month in August.

The hedge fund industry now manages $2.87 trillion of investor money. The average hedge fund is down 1.5 percent as of the end of September, according to HFR. The Standard & Poor’s 500 stock index, by comparison is down by just over 1 percent.

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