Hedge funds report worst monthly performance in two years

Hedge funds have been hard hit by the European debt crisis, pushing their returns last month to the lowest level in almost two years, a research firm said.

A HFRI hedge fund tracking index lost 2.26% last month, the worst return since November 2008, according to Hedge Fund Research, the Chicago-based industry tracker.

The fall leaves the industry that once promised exceptional returns with a net gain of 1.3% during the first five months of the year. The FTSE-100 Index lost 4.1% over the same period with markets all over the world hit by doubts over the ability of countries such as Greece to service their debts.

Hedge funds were widely blamed for exacerbating the European crisis by placing bets against Greek sovereign debt and against the euro.

"Hedge funds were broadly impacted by the sharp increase in risk aversion associated directly with the sovereign bond crisis escalation," Hedge Fund Research said .

But money still poured into hedge funds for a second consecutive quarter, making the industry reach $1.66tn (£1.2tn)of assets under management, up from $1.60tn in the last quarter of last year, HFR said. The hedge fund industry reached a record $1.8tn under management at the peak of the market in 2007, but the figure is now lower following client withdrawals and the credit and equity losses suffered during the credit crunch.

The industry, once the favourite investment vehicle of wealthy individuals, is now dominated by institutional investors, such as pension funds and other asset managers.

Bulk of the inflow was into funds with more than $5bn under management, making the big companies even bigger. More industry consolidation is expected, following the $1.6bn acquisition of GLG Partners by Man Group, both based in London.

The industry is battling the forthcoming European Union directive on hedge funds and private equity firms, which will require them to disclose more information, as well as force them to be based in Europe to operate within the EU.

Some regulators blame hedge funds for exacerbating the credit crunch and the European sovereign debt crisis, by betting that government bonds or bank shares would plunge.

"It's tenuous to suggest that there's a connection between hedge funds and the European debt crisis," said Ken Heinz, President of HFR. "The origin of that is the governments that have exceeded budget deficits over their GDP requirements."