naked capitalism

Not only is the $43 billion number, um, impressive, but recall September was a dreadful month for many funds. Industry experts see more redemptions in the offing. Moreover, London is a bigger hedge fund center than the New York metro area, where the vast majority of hedge funds ply their trade, so the US figures considerably understate total withdrawals.

From the Financial Times:

Investors pulled at least $43bn from US hedge funds in September…

The data from TrimTabs Investment Research – which was to be sent to clients late on Wednesday – come as hedge funds are working to prevent far bigger redemptions by the end of the year, when many funds give investors a chance to take out money.

Withdrawals can lead to a vicious circle in the markets, as funds sell holdings to return money to clients, depressing prices and prompting further redemptions.

To prevent such an outcome, some hedge funds had offered to suspend fees if investors kept their money in until March, said Marc Freed, of Lyster Watson, which invests in hedge funds on behalf of institutional and private clients.

“Every investor fears other investors will pull their money and so they worry they will be at the back of the line if they don’t also pull,” Mr Freed said.

“Nobody will invest in anything illiquid because they think they may not survive long enough to see them rise in value.”

A fundraiser for a major hedge fund said the period “between now and December 1 is a sort of death march” for the industry.

The chief executive of a leading alternative investment manager said he expected the hedge fund industry to shrink by 50 per cent in coming months – with half the decline coming from withdrawals and half coming from investment losses.

Conrad Gunn, chief operating officer of TrimTabs, said the $43bn in September withdrawals would mark “the beginning of what we expect to be a series of outflows for the remainder of the year. We expect October outflows to be larger”….

The industry, which manages close to $2,000bn, has experienced outflows during only a handful of months previously, including a small outflow in April of this year.

JPMorgan Chase has estimated that hedge fund outflows could total up to $150bn over the coming year. As investors take their money out of hedge funds, the funds have to sell assets.

But because they use so much borrowed money, the amount of potential asset sales is far larger. For example, JPMorgan expects that an outflow of $150bn will lead to sales of about $400bn.

Note that leverage figure is disputed; I’ve read hedge fund industry surveys claims that hedge funds on average are levered only 1:1. But even if that lower figure were true, redemptions of $150 billion would generate sales of $300 billion.

The Financial Times has another hedge fund woes story today, this one the result of the Lehman bankruptcy:

A group of the largest US hedge funds has called on the Bank of England to intervene to free an estimated $65bn (£38bn) in assets frozen in London in the collapse of Lehman Brothers, warning that delays “could be disastrous for UK plc”.

The funds, through the Managed Funds Association, said the scale of the problem was so great that it could undermine bank rescue plans as tens of billions of dollars would be kept out of the market. It was also likely to lead to the failure of some fund managers, said Richard Baker, chief executive of the MFA….

However, the Bank said it had “no powers” to override the administration process. Administrators at PwC running Lehman’s London business have won court approval for a process to work out how much they hold in protected assets but have warned it could take years to finalise.

Steven Pearson, one of the administrators, told Bloomberg that clients had $45bn of investments held through Lehman’s European prime brokerage, with another $20bn in short positions, bets that shares will fall in price.