Many of the world’s largest hedge funds have been left nursing billions of dollars in losses following the industry’s most brutal month since the collapse of Lehman Brothers.

Falling equity markets worldwide have caught hedge fund managers off-guard, leading to significant losses as portfolios declined in value and managers sold holdings, crystallising losses.

According to provisional estimates from consultancy Hedge Fund Research, the average hedge fund has lost 4.1 per cent during August – making the month the industry’s fourth worst ever.

Among the biggest losses are those at the $36bn Paulson & Co, which shot to prominence thanks to its spectacular bets against the US subprime market in 2007. As of August 19, the firm’s flagship Advantage Plus fund was down 14 per cent in the month, one investor revealed – taking the funds losses to just under 39 per cent – about $4bn – so far this year.

Other so-called “event driven” funds – which trade around specific events such as takeovers, IPOs or bankruptcies – have also suffered. Owl Creek Asset Management, run by Jeffrey Altman, saw its flagship $5bn offshore fund down 9.3 per cent by mid August, while York Capital’s $2bn York Investment fund had lost 5 per cent.

Insiders say many funds were caught out by the market’s sudden preoccupation with macroeconomic events, particularly in the US. This wrongfooted managers who were focused on fundamental bottom-up analysis of companies.

Many traditional equity long/short managers, which aim to protect their “long” bets with “short” positions, were caught out because they had only put on light hedges against market falls.

Highbridge Capital, the fund owned by JPMorgan, saw its long/short equity fund down 9.2 per cent by the middle of this month. Pershing Square, the activist hedge fund manager run by Bill Ackman, saw its flagship $5.5bn fund down 6.7 per cent.

Very few funds have avoided losses, according to brokers. “We’ve seen a very big deleveraging from managers,” said the head of one large prime brokerage.

Similar losses came at the $5.4bn flagship fund of Perry Capital, which was down 5.4 per cent, according to an investor.

Big-name European funds have also seen their portfolios dented. Egerton Capital, one of Europe’s oldest hedge funds, saw its main vehicle drop just under 5 per cent in the first two weeks of August.

Sloane Robinson has seen losses across its range of funds. The $1.4bn Sloane Robinson Global fund was down 7 per cent mid-month, while the $2.6bn Sloane Robinson Emerging Markets fund was down nearly 11 per cent.

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