We wrote earlier that the hedge fund industry was facing significant redemptions due to lousy performance and the desire of many investors to reduce their risk exposures.
The Lehman bankruptcy, the biggest to date, is pouring gas on that fire. Hedge funds in the US report their net asset values monthly (evidently the convention in the UK, an even bigger hedge fund center, is quarterly), so the next reporting date is imminent. Many have positions frozen in the Lehman bankruptcy and in the absence of a resolution (which is expected to take months), they will need to take sizable, perhaps excessive, writedowns now.
Regardless of whether the marks these hedge funds take on their stuck positions are too high or turn out to be roughly correct, this situation is likely to add to the exodus from hedge funds. More redemptions mean more sales of securities, depressing prices. The administrator is trying to speed up the Lehman wind-up, but the options appear to be limited.
The great unwind is on.
From the Times Online (hat tip reader Saboor):
Hedge funds and institutions could be forced this week to write down billions of dollars related to trading positions that were frozen when Lehman Brothers was put into administration two weeks ago.
More than 90,000 trades worth $13.9 billion (£7.6 billion) were left unsettled when Lehman collapsed and it will take “many months or years” to sift through the wreckage, said Tony Lomas, the lead administrator at Price Waterhouse Coopers (PWC). Until every counterparty’s position is determined, PWC said it would be unable to remunerate creditors or settle trades. “We have to be fair to all creditors,” Lomas said. “It will take months, even years.”
For some hedge funds already nursing heavy losses from the volatility of recent weeks and a ban on short-sell-ing, the slow pace of Lehman’s unwinding will do damage. Tomorrow the industry must send its quarterly valuation figures to investors. “They will need to form a view on the value of their relative position with us,” Lomas said. Many are expected to write down the value of their trades substantially, or to zero.
Lomas said that about 30 hedge funds made urgent pleas for the return of shares or cash. Complicating PWC’s task is a $27 billion negative position that Lehman has in borrowed stock. When the European business collapsed, it had $87 billion worth of stock on loan, versus $60 billion it had lent out. PWC has offered to cancel trades with counter-parties on a bilateral basis, but has refused to do so wholesale.
Efforts to sell the rest of the business continue, though talks for its fixed-income business ran aground after Nomura failed to table an offer by Friday’s deadline. No other bidders have emerged. PWC is also negotiating with potential buyers for Lehman Brothers Asset Management, which looks after $3.5 billion of funds.