Oct. 22 (Bloomberg) -- Hedge funds worldwide posted record monthly losses in September, according to Eurekahedge Pte., as short sale bans and client redemptions amid the credit crisis hurt funds including Citadel Investment Group Inc.

The Eurekahedge Hedge Fund Index, which tracks 2,431 funds that invest globally, declined 4.7 percent, preliminary figures from the data provider show. The drop is the biggest one-month loss since it began collecting data in 2000 and the index, down 7.9 percent through September, is set for its worst year on record.

``The volatility has been difficult even for seasoned veterans to manage; one day the markets plunge on apocalyptic fundamentals, and the next day they surge,'' said Robert Howe, founder of Hong Kong-based hedge fund manager Geomatrix (HK) Ltd., which oversees $32 million. ``As many managers just liquidate to wait out the storm, or clients do it for them, money drains out of all investment strategies.''

Hedge funds have suffered in a financial market contagion triggered by the collapse of the U.S. subprime mortgage market last year, losing about $88 billion of assets on investment declines and investor withdrawals in September. That's reduced the industry's total size to about $1.8 trillion, according to Singapore-based Eurekahedge.

Money overseen by hedge funds has grown to about $1.9 trillion from $490 billion at the start of the decade, according to Hedge Fund Research Inc. of Chicago.

Europe Leads Drop

Managers investing in European markets were among the worst performers, sliding 6.9 percent, followed by those investing in emerging markets, which fell 6.8 percent, according to Eurekahedge.

The Eurekahedge North American Hedge Fund Index dropped 5.3 percent, while the Eurekahedge Asian Hedge Fund Index declined 4.8 percent. The index tracking Japan investments and Latin America were least affected, losing 4.4 percent and 4.1 percent respectively.

By strategy, September marked the worst month on record for so-called arbitrage and relative value funds, which attempt to profit from price discrepancies between markets, and macro funds -- those seeking to profit from economic trends by trading stocks, bonds, currencies and commodities, Eurekahedge said.

Managers who trade futures, known as commodity trading advisers or CTAs, was the sole strategy that posted gains in September, as bets on oil futures and volatility helped stem losses on market-wide declines in asset prices, Eurekahedge said.

Lehman Bankruptcy

Lehman Brothers Holdings Inc., once the fourth-largest securities firm, filed for bankruptcy protection in September while American International Group Inc., Fannie Mae and Freddie Mac were bailed out by the U.S. government, sending the MSCI World Index into its biggest monthly slide since August 1998.

The decline in markets also came as the U.S. Securities and Exchange Commission temporarily banned short selling of more than 900 stocks. In a short sale, an investor sells a borrowed security, aiming to profit by repurchasing it later at a lower price and returning it to the holder, pocketing the difference.

Citadel Investment's biggest hedge fund fell as much as 30 percent this year because of losses on convertible bonds, stocks and corporate debt, two people familiar with the Chicago-based firm said earlier this month.

Tantallon, Japan Macro

While hedge fund managers have struggled, they have still outperformed the key benchmarks. An index tracking managers of so- called long-short funds, who bet on rising and falling stock prices, declined 6.6 percent, compared with the MSCI World Index's 12 percent slide in September, the report showed.

Among those that employ those strategies in Asia, the Tantallon Fund, a long-short fund managed by Singapore-based Tantallon Capital, declined 4.2 percent in September, according to data compiled by Bloomberg. Assets shrank to $544 million at the end of the month, from $1.5 billion at the start of the year.

The QAM Asian Equities Fund managed by Quant Asset Management, a Singapore-based hedge fund, which uses computer models to pick trades, fell 4.8 percent in September, according to the firm.

The Japan Macro Fund, run by Singapore-based Asia Genesis Asset Management Pte, fell 1.8 percent last month, the worst month this year, according to Chua Soon Hock, managing director of the firm and the manager of the fund. The $745 million hedge fund trimmed its year-to-date advance to 9.3 percent, he said.

The Akamai Pan Asia fund, run by Geomatrix, ended September down 0.8 percent as it closed some of its short positions after countries including the U.S. and Australia introduced temporary bans for short selling. The fund said it bought long-term holdings in Japan, Hong Kong, South Korea, Australia and India.

Artradis, Myojo

Not all posted negative returns. The Artradis AB2 fund, run by Singapore's biggest hedge-fund firm, gained 5 percent in September, according to two people with knowledge of its performance said. The fund seeks to produce returns that aren't correlated with the market by trading instruments that thrive on volatility, such as options, warrants, and convertible bonds.

Merchant Commodity Fund, the hedge fund run by former Cargill Inc. traders Michael Coleman and Doug King, gained 12 percent in September as energy and agricultural prices slumped, two people with knowledge of its performance said.

In Japan, the Myojo Japan Long Short Fund, run by Myojo Asset Management Japan Co., gained 1.6 percent in September, as it sold Japanese stocks that are sensitive to economic trends such as shipping, steelmakers and machinery makers, while it bought financial stocks, Chief Executive Officer Makoto Kikuchi said.

``The financial landscape has permanently changed after the historic events of September, and markets are seized up by a crisis of investor confidence,'' the data provider said in a report posted on its Web site. ``The primary challenge for hedge fund managers is to de-leverage and resize positions to appropriate levels, and to manage cash levels in order to meet any investor redemptions in the coming months.''

Hedge funds are mostly private pools of capital whose managers participate substantially in profits from their bets on whether the prices of assets will rise or fall.

To contact the reporter on this story: Tomoko Yamazaki in Tokyo at tyamazaki@bloomberg.net

Last Updated: October 21, 2008 22:41 EDT