The Financial Times reports that hedge fund withdrawals reached unprecedented levels in October (and remember, some funds barred or limited redemptions). With the markets continuing to be very difficult and October results nearly as bad as September, more investor exits are clearly in the offing.
One bit of good news: enough funds are heavily in cash in anticipation of these investor demands that observers believe that markets will suffer considerably less from forced selling.
From the Financial Times:
Hedge fund investors pulled a record $40bn out of the industry in October as poor performance prompted a flight to cash…
The industry lost another $115bn through poor performance, leaving total assets down 9 per cent at $1,560bn. Investors and managers said redemptions would be far bigger at the end of the year because many funds had long notice periods and only allowed quarterly withdrawals…
However, many of the biggest hedge funds are now sitting on cash piles of as much as half their assets, leaving them with a big cushion against year-end withdrawals and limiting future sell-offs by the industry.
Christopher Fawcett, chief executive of Fauchier Partners, a London fund of hedge funds half-owned by BNP Paribas, and chairman of the industry trade body, said redemptions would be “much more” than $40bn.
He said Swiss private banks were leading the redemptions, as many of their clients had borrowed to invest in hedge funds, followed by automatic withdrawals by structured products. “At the other extreme people who are not redeeming are pension funds, and we have seen a trickle of inflows from them,” he said.
Eurekahedge, another data provider, last week estimated net withdrawals from the industry in October at $62.7bn, while analyst estimates of how far the industry could eventually shrink were 25-50 per cent.
Many investors in the industry argue that hedge fund performance – down 16 per cent this year, its worst yet – should improve as the amount of money in the industry drops….
Still, large sums are waiting to be paid out from funds, such as London’s Polygon, which is shutting down, and many others that have frozen or limited with drawals.
Thank you for the great cutting and pasting of these articles, Yves. Thanks to your site I don’t even have to go to the Bloomberg and FT sites to get my info.
$1560bn—wow that’s alot of money sitting on the sidelines. Maybe we are near the bottom.
What a terrible day in the markets! Nowhere to run and nowhere to hide. Interesting times, indeed.
Actually, the $1560bn is total assets. According the article, some funds have upto 50% in cash for redemptions.
Assuming generously that the industry as a whole is sitting on 1/3 cash, that would be ~$500bil, or about the amount of market cap the S&P lost today. At best, all that cash could save the markets from one bad day like today, not force a true bottom.
This redemption issue is what will be interesting, because those short term Treasuries yielding about zero will tie up money in bills that are burning cash, which will impact the hedges even more, and the other factor is that to buy into these non-yielding bills is costing more and more dough. In a nutshell, this interplay will bring about unique impacts during heavy redemption periods that stress the risk models and at some point, this stress will break the buck for various funds that are in weak situations.
Then again, I’m just making this up and live with several supermodels in the LHC.