Though the third quarter was a strong one for hedge and arbitrage funds, both suffered tremendous losses in October due to drops in energy stocks, merger and acquisition deals that fell apart, exposure to the credit markets and a difficult environment for stock and bonds, CNN/Money reports.

October has always been a rough month, but this year was particularly rough, with some long/short funds possibly losing as much as 8% to 10%. And the difficult environment has been true domestically as well as offshore.

"Outside Japan, most of the major markets are down, the emerging markets got hurt a lot, and macro funds that decided to go long in October are going to get hurt very badly," said Larry Smith, chief investment officer of Third Wave Global Investors, a Greenwich, Conn-based hedge fund.

Companies like Cantilion World Ltd., Atticus Capital and Gartmore, have all suffered tremendous losses. Gartmore even sent out a letter to its investors, informing them of the 3.5% losses that its AlphaGen Capella fund suffered in the first three weeks of the month.

The losses are partly caused by the beating energy stocks took in the month, but the rest of the market did not do well, either. The S&P 500 declined 4.1% and the Russell 2000 Index declined 6.6%.

There was also the issue of bad timing. "With volatility down as low as it was, [these funds] probably felt the need to get net exposure to credit and seem to have done it at the wrong time and gotten burned in October," said Smith.

The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.

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