New York: John Paulson, Louis Bacon and Andreas Halvorsen navigated the global market turmoil of 2008 with little or no damage. They weren’t as successful last month as the Dow Jones Industrial average had its worst May since 1940.

Hedge funds lost an average of 2.7% through 27 May, according to the HFRX Global Hedge Fund index, as the sovereign debt crisis in Europe triggered declines in stocks, the euro and commodities, and the gap in yields between US short-term and long-term debt narrowed. It was the biggest decline since November 2008, when hedge funds lost 3% in the wake of Lehman Brothers Holdings Inc.’s bankruptcy two months earlier.

Taking a beating: John Paulson’s Advantage fund dropped 6.9% through 21 May, dragging it to a year-to-date loss of 3.3%. Rick Maiman/Bloomberg

“Attempting to manage risk in an environment where everything that could go wrong does go wrong seems like a fruitless endeavour," said Brad Balter, who runs Balter Capital Management Llc, a Boston firm that invests in hedge funds for clients. “The only defence that seems to work in months like these is being in cash."

Paulson’s Advantage fund dropped 6.9% through 21 May, dragging it to a year-to-date loss of 3.3%, according to investors with knowledge of the results, who asked not to be named because the information is private. Halvorsen’s Viking Global fund fell 3.4% in the same span and 2.9% for the year. Bacon’s Moore Global declined 7.7% as of 20 May and 4.8% in 2010, investors said.

Representatives of Paulson and Co., Viking Global Investors Lp and Moore Capital Management Llc, the New York-based firms that oversee the funds, declined to comment. Paulson, Halvorsen and Bacon have among the best long-term returns in the industry, each with average gains of 20% or more since they started.

Paulson Advantage fund climbed 25% in 2008 while the S&P 500 slumped 37% including dividends, its largest setback since the Great Depression. Viking rose 0.1% that year and Moore Global slid 4.6%, offering investors the type of bear-market shelter they look for in hedge funds.

Many of the wagers that hedge funds put on to protect against falling markets didn’t work, Balter said.

Their bets on falling stocks didn’t make enough money to counter losses in shares the managers expected to climb. Commodities retreated 8.2% in May, as measured by the UBS Bloomberg CMCI index. Traders who positioned themselves for the US yield curve to steepen, a sign of expected economic growth, suffered losses when the difference between payouts on two-year and 10-year treasury notes narrowed instead.

The spread shrank from 269 basis points at the end of April to 252 on 28 May. A basis point is one-hundredth of a percent.

SAC Capital Advisors Llc, the hedge-fund firm run by Steven Cohen in Stamford, Connecticut, with about $12 billion under management, lost 2.9% last month through 21 May with its SAC Capital International fund, trimming this year’s gain to about 45, according to people familiar with the firm.

Citadel Investment Group Llc, the $12 billion hedge-fund firm run by Ken Griffin, lost about 2% with its biggest funds last month through 21 May, said people familiar with the firm. The funds soared as much as 62% last year as markets rebounded after losing as much as 55% in 2008.