Fischer Black and Myron Scholes revolutionized the financial world by introducing the Black/Scholes Option Pricing Model. This model, or equation, allows an investor to determine the fair value of a financial option, such as a call. [A call gives its owner the right to buy 100 shares of stock at a specified price, e.g. $50, within a specified time period, like a few months.] Since virtually all financial securities have some characteristics of financial options, the model was a breakthrough in properly valuing securities and became a popular part of hedge funds' tool kit They won the Nobel Prize in Economics in 1997 for developing the model. Scholes said last July that innovation rather than regulation was the best medicine for averting further crises. He said financial shocks had a positive impact by forcing people to examine the failure of previous models - - he is unlikely to have the pleasure of joining a dole queue. “From chaos comes a new learning. Innovation results from chaos,” he said. ”I’m pessimistic in the short run, but very optimistic going forward.” Platinum Grove Asset Management, the hedge-fund firm co-founded Scholes, temporarily stopped investor withdrawals from its biggest fund after it lost 29% in the first half of October. Robert Merton, who was a co-winner of the 1997 Nobel prize and co-founder of the defunct hedge fund Long-Term Capital Management, which triggered a crisis in 1998, shut down a fund last August after three months because it did not raise enough money.

Hedge funds as measured by both the Greenwich Global Hedge Fund Index (GGHF) and the Greenwich Composite Investable Index (GI2) declined marginally when compared with global equity returns during the month of October. The GGHFI and GI2 posted declines of -5.06% and -8.53% on the month, respectively, compared to global equity returns in the S&P 500 Total Return (-16.79%), MSCI World Equity (-19.05%), and FTSE 100 (-10.71%) equity indices. Year-to-date, the GGHFI and the GI2 have shed -14.29% and -16.60%, respectively, while the S&P 500 Total Return, MSCI World Equity, and FTSE 100 Indices have lost -32.84%, -39.75%, and -32.21%, correspondingly. 36% of constituent funds in the GGHFI ended the month with gains.

“October’s returns are the result of similar market conditions that impacted hedge funds in September. Although long/short equity funds were notably lower, other event driven and arbitrage funds that trade in more illiquid securities were also negatively affected due to redemptions and forced selling,” Margaret Gilbert, Managing Director of Greenwich Alternative Investments said.

Long/Short Equity managers experienced roughly half the losses of global equity markets during October, losing -7.88% on average. Value funds performed slightly better than Growth oriented managers, but both declined -8.91%, and -10.42%, respectively. Short Selling managers continued to take advantage of weak equity markets, producing their best month to date, with funds advancing +11.06%. Year-to-date, Short Selling funds have gained more than 25% and remain the best performing subsector of hedge fund strategies.

Market Neutral funds once again felt the effects of illiquid credit markets during the month of October, falling by -4.59%. Convertible Arbitrage managers suffered their worst month to date, losing -19.96% as redemptions and forced selling worsened an already unstable market for convertible bonds. Fixed Income and Other Arbitrage managers performed better, but still lost ground on the month, falling by -5.31% and -2.26%, respectively. Event Driven managers were dragged lower by distressed fund managers in particular, as they declined -8.63% on the month.

For the second month in a row, Directional Trading managers moved higher, capitalizing on volatile commodity markets. These funds were up on average by 4.88%. Futures managers turned in another strong month, advancing by 6.61%. Macro managers showed mixed results, with the average return down -0.30%.

Specialty Strategy managers were the weakest performing strategy group for the month of October, with funds losing -10.58% on average. Emerging Market funds suffered one of their worst months on record, losing -15.19% due to dramatic declines in BRIC equity indices.

Hedge Fund losses for the full year 2008 are expected to be the biggest on record.