By Svea Herbst-Bayliss at Reuters
U.S. hedge funds are bracing for their worst year since the 2008 financial crisis after a dramatic sell-off in healthcare and biotechnology stocks triggered double-digit losses for some prominent players last month.
September's sucker punch in the biotech sector, on top of a grim August when global markets tumbled due to fears about slowing growth in China, have pushed many hedge fund managers deep into the red.
The average hedge fund lost 19 percent in 2008 when the credit crunch hit. Since then, hedge funds have had only one down year, when they lost 5.25 percent in 2011, data from Hedge Fund Research show.
While the biotech sector held up relatively well during the initial market sell-off in August, it cratered in September.
"It was the last remaining bastion of alpha and a sector where many hedge funds were hiding. Now it has succumbed," said Peter Rup, chief executive and chief investment officer at Artemis Wealth Advisors Llc, which invests in hedge funds.
Rup said he was expecting some big negative surprises as more hedge funds send September returns to clients.
Larry Robbins' Glenview Capital Management tumbled 12.35 percent last month, an investor said on Friday, after bets on Tenet Healthcare Corp, Community Health Systems Inc and Mylan NV all suffered double-digit losses.
Even though the fund was largely flat after August, it is now off 12.8 percent for the year to date.
For Nehal Chopra's Tiger Ratan fund, which delivered some of the year's best returns with a 21 percent gain through the end of August, the drops in Horizon Pharma Plc, Valeant Pharmaceuticals International Inc and Mylan Inc erased all gains, leaving the fund in the red, two people familiar with her returns said.
Double-digit losses in Genocea Biosciences Inc and AMAG Pharmaceuticals Inc also dealt a blow to Jason Karp's Tourbillion Capital Partners as the fund lost 8.12 percent in September, shrinking its year-to-date gain to 8.73 percent.
Some of America's most prominent hedge funds have seen their returns crumble.
David Einhorn's Greenlight Capital, now off 17 percent, is on track to post its first losses since 2008. And William Ackman's Pershing Square Capital Management, which has a big bet on Valeant, told investors on Thursday that its Pershing Square Holdings portfolio is now off 12.6 percent for the year, a big reversal of fortune after 2014's 40 percent gain.
"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," Stanley Altshuller, founding partner at research firm Novus, wrote in a report.
To be sure, there are some winners in the mix as well, including Lee Ainslie's Maverick Capital which was off only 0.7 percent through Sept. 25, leaving it up 19.7 percent for the year.
But the sudden, sharp drops could prompt some investors to pull their money out, even though the average fund is still doing better than the wider market, down 3 percent for the year, compared with a 7 percent drop in the Standard & Poor's Index, according to preliminary data from Hedge Fund Research.
Veterans of 2008 were sanguine.
"A month or two of performance issues is to be expected in the environment we are in," said George Hopkins, executive director at the $14.5 billion Arkansas Teacher Retirement System, which invests with hedge funds. "Our trustees are battle-hardened. We survived 2008 when we stayed a course that other people left and we benefited significantly."