Hedge Funds Off to Poor Start in 2010

Hedge funds had their fourth worst first half in more than 20 years according to the Hennessee Group. Though hedge funds outperformed the major stock averages in the first half of 2010, .2% vs -7%, it still ranked among the worst first half performances. In 2009, the Hennessee Hedge Fund Index was up over 11% January through June. In 2008, one of the worst years for hedge funds given the broad market declines, hedge funds were down over 2% through June and finished the year down 19.9%.

The best performing hedge fund sectors in 2010 have been the debt categories with Fixed Income up 5.69%, High Yield up 4.42%, and Distressed up 3.87%. This comes amid tightening spreads between high yield debt and government securities.

The worst performing hedge fund strategies in 2010 are, somewhat unsurprisingly, Europe funds down 6.46%, Health Care down 2.85%, and Growth down 1.95%.

Alphabet Management Hedge Fund Attracting Top Talent

New York based hedge fund Alphabet Management landed Nelson Saiers, a managing director of derivatives trading with Deutsche Bank. Saiers will lead a group that trades derivatives including volatility options. The departure comes amid Deutsche Bank's decision to close down its proprietary trading operations.

Even Successful Hedge Funds Face Withdrawals

Even the most successful hedge funds can face withdrawals. This was illustrated in June as giant hedge fund Paulson & Co. lost more than $2 billion in assets under management. Although, about the thirds of that amount can be accounted for by market losses, Paulson & Co. likely paid out about $600 million in investor withdrawal requests. In June, Paulson & Co.'s financial services Recovery Fund, lost more than 12%. Paulson's best performing fund was its gold fund, up more than 7% in June.

On the other hand, hedge funds actually did quite well in May in terms of investor flows, taking in more than $4 billion in new assets, even while the industry lost $30 billion in trading the same month.

Source: Market Watch

Hedge Funds No Longer Bullish on Oil

Hedge funds are no longer bullish on oil. In July, hedge funds have been taking bullish oil bets off the table. Net-long positions on the NY Mercantile Exchange fell to 15 month lows in the first week of July. This as oil prices rose more than 5% to over $76 / barrel. Additionally, oil contract volatility has been rising of late.

With Financial Bill Looming, What is Impact for Hedge Funds?

The largest financial reform bill in more than 70 years is expected to pass this week and many are asking what impact the bill will have on hedge funds. The impact of the Dodd-Frank bill—named on the hedge fund industry, remains an open question. The legislation is more than 2300 pages, and even a thorough reading won't reveal the ultimate impact of such a bill on hedge funds.

As the current bill reads, hedge funds would face some greater oversight. Hedge funds with more than $150 million in AUM would have to register with the SEC, though more than half of hedge funds are already registered.

One also has to wonder how the SEC, which so miserably failed to oversee the hedge funds and financial institutions it already regulates, will be able to provide competent oversight of even more firms. If the SEC couldn't devote the resources to police banks with trillions in assets, how can we expect them to competently oversee $200 million hedge funds?

The new bill would also introduce a water-down Volker rule which will permit bank holding companies to invest up to 3% of their assets in hedge funds and other alternative investments.