Hedge Funds Concede Errors, Profess Optimism After Worst Losses

Hedge fund managers, after enduring the industry's worst month in a decade, are seeking to explain to investors what went wrong and what they are doing about it.

``We clearly underestimated several things, most importantly the tsunami of redemptions that are being delivered to hedge funds as investors line up to get out of these funds as well as record outflows from equity mutual funds,'' Jeffrey Gendell, who runs Greenwich, Connecticut-based Tontine Associates LLC, wrote in an Oct. 1 letter to clients.

``I am not a nervous person by nature, but should have been under the circumstances,'' wrote Gendell, whose Tontine Partners LP fund plunged 59 percent in September, leaving it down 67 percent for the year, according to investors. Gendell, 49, had expected shares of steel, engineering, airline and chemical companies to appreciate because of falling oil prices. Instead they plummeted.

Hedge funds, which endeavor to make money whether markets rise or fall, lost an average of 4.7 percent in September, the biggest monthly decline since August 1998, according to data compiled by Hedge Fund Research Inc. Funds fell 17 percent this year through Oct. 9, compared with the 38 percent decline by the MSCI World Index of stocks. It was the worst performance by the lightly regulated private pools of capital since the Chicago- based firm began collecting data.

Failure Rate

As much as a third of hedge funds may close in the next two years, according to a Sept. 29 report by Zurich-based analysts at Credit Suisse Group AG. There were about 3,100 hedge funds that managed a combined $1.9 trillion as of June 30, according to Hedge Fund Research. This year's investment losses mean many funds won't be able to collect performance fees, usually 20 percent of gains, while management fees, usually 2 percent of assets, will shrink.

Managers have been selling assets, both to raise cash for what they expect to be a surge in year-end redemption requests and to preserve capital as market volatility has risen to record levels. The Standard & Poor's 500 Index yesterday rebounded from its worst week in 75 years with an 11.6 percent advance.

David Slager, manager of the Atticus European Fund, told investors that more than 50 percent of his fund is now in cash or U.S. Treasuries after he lost 43.5 percent so far this year.