“September 2008 will prove to be one of the most challenging months in the history of hedge funds,” said Charles Gradante, managing principal. “We expect the average hedge fund to be down between 5 and 9 per cent for the month.”

The firm says three factors have been at work, the first being restrictions on short selling in place mid-month but expected to be temporary.

The second is that current markets are being driven by fear and liquidity rather than fundamentals.  The deleveraging by large institutions has caused core, fundamentally sound, longs to sell off more than the market and short covering to prop up fundamentally weak companies, creating a very challenging environment for hedge fund managers to generate alpha on either side of their portfolios.

The third is that credit restrictions and counterparty concerns have led to additional deleveraging across the industry. 

In response, hedge funds have further reduced net and gross exposures, with many sitting on significant cash balances.  Many managers are stating that they are beginning to see attractive opportunities on both the long and short side; however, they will be patient and selective before putting capital to work.