Hedge funds feel the credit crunch pain

Highland Capital, a long-established hedge fund manager based in Dallas, is closing two of its most famous funds, the latest victims of the worst period in the industry's history.

Amid heavy losses and vicious market conditions, Highland told clients that it would liquidate its Crusader and Credit Strategies funds, which had a combined $1.5bn of assets between them.

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At its peak, the Crusader fund alone had assets of $3bn, but the turmoil in the financial markets and the introduction of restrictions of short-selling have contributed to spiraling losses. With conditions deteriorating in recent days, creditors seized some of its assets the funds had put up collateral. Barclays Capital, investment banking arm of the UK banking group, seized $642m of leveraged loans from Highland on Wednesday and was offering the debt for sale in an auction yesterday.

"Unprecedented market volatility and disruption to the financial system continue to pose huge challenges, with conditions having deteriorated significantly over the past 60 days and in particular over the last two weeks," Highland partners wrote in a letter to their clients. "The environment is one where the fundamental tools to manage the funds, hedging, shorting and financing are highly constrained, and in some cases unavailable."

Highland founders James Dondero and Mark Okada, who set the firm up in 1993, are just the latest high-profile casualties of the major contraction facing the $2trl hedge fund industry.

Funds are getting less generous treatment from investment banks that in previous years have offered easy credit to funds, which allows them to leverage their underlying assets and make much larger bets in the financial markets. The average hedge fund lost 10 percent in the first nine months of the year, according to Hedge Fund Research data, and some industry observers believe that the number of funds could be halved before the crisis is over.