ajtj99's Market Pulse

[hunkerdown]

More Hedge Fund Selling Down The Road?

Hedge managers brace for shrinking feeling

By Kate Burgess
This weekend is a witching hour for hedge fund managers. Many will receive redemption requests from clients wanting to cash in their holdings at the end of December.

After the sharp deterioration in asset values and market turmoil since the end of September, many analysts have predicted a surge in client requests to withdraw their money. It could mark a critical moment for the industry, allowing it to quantify accurately for the first time how much money will be withdrawn by the year end. From there, managers will be able to assess how much more of their investment portfolios they might have to sell to meet redemption requests.

Many funds allow monthly withdrawals. But as one analyst says: "Macro and multi-strategy funds are mostly on 45- and 30-day notice periods, and November 15 will be first opportunity for these clients to vote with their feet on September's and October's performance."
continued from previous page
For some investors, hit by unrelenting bouts of market turmoil and poor performance, a wave of more redemptions in December will be the final straw.

"This quarter raises major questions for the industry," says a fund of hedge fund manager. The money flowing out of the industry "will be the highest it has ever seen. We are watching the tidal wave that helped hedge fund managers build their businesses fast over the past 10 years suddenly turn back even faster. The industry could halve in six months."

George Soros told US Congress this week the industry could shrink by up to 75 per cent next year.

For more than a year hedge funds have come under pressure from rising withdrawals. At the same time, prime brokers have been jacking up the costs for funding hedge funds and raising collateral demands.

Banks and investors have become more risk-averse amid unprecedented volatility and illiquidity, causing a race to sell assets before markets freeze up entirely.

This has led to a massive reduction in money borrowed by funds, which have sold assets to "deleverage" their portfolios even if it means crystallising losses and sacrificing fees.

Risk-aversion is expected to increase in the next two months as banks, facing year-ends in November and December, will become more careful to conserve their capital, warn hedge fund managers.

Falls in the value of Man Group, the world's largest listed hedge fund manager, illustrate the scale of concern about the industry. Man's shares have halved in a week after it surprised the market by revealing faster and worse-than-expected falls in assets under management, largely as a result of deleveraging. Analysts say it could be forced into further asset sales as redemptions pick up.

Additional pressure is now coming from funds of hedge funds, which are reckoned to own as much as a third of single-manager hedge funds. Many are expected to put in redemption requests in anticipation of high levels of withdrawals from their own investors in coming months.

"There is a mad rush for liquidity," says one manager of a fund of hedge funds.

"Clients are taking what cash they can, where they can, regardless of whether a fund is performing well or poorly," says another.

Many funds have put up gates and barriers to lock in investors and block redemptions. Fund of hedge fund managers are beginning to do the same.

Managers fear that if they do not, withdrawals will set off another bout of selling into falling markets, spurring another vicious cycle of redemptions and selling.

Despite hedge funds' best efforts to stem the outflows, analysts at Morgan Stanley say: "We think we may see 20 to 30 per cent net redemptions from European/Asian hedge funds and 10 to 15 per cent from US hedge funds, as clients seek to de-lever.

"On top of this, hedge funds are down 15 per cent year-to-date. We forecast hedge fund assets could shrink by at least 35 per cent from $1,900bn at June 2008 to $1,300bn."

If the worst comes to the worst, says Morgan Stanley, hedge fund assets could be down a further 45 per cent by next year to below the $1,000bn mark.
http://us.ft.com/ftgateway/superpage.ft?news_id=fto111420081826502330