$55bn Run On Hedge Funds In July

As the markets took a battering, July saw the biggest withdrawals from hedge funds in seven years. In total $55bn was withdrawn with inflows in the same period of $23bn. The figures based on data from TrimTabs and Barclayhedge reports show how jittery some investors were becoming during this period.

General reports in the market suggest that these redemptions will pale into insignificance when the results of redemptions are issued for August, in early October. It will be interesting to see which funds are the worst affected but the general consensus is that it is likely to be the computer driven or 'quant' funds that took quite a hit in August, however, commentators are saying that these funds have made up some of the losses which would make those who blinked first by withdrawing funds a little sore.

One of the interesting comments to come out of the report was from Charles Biderman, of TrimTabs. He believes the fall in investment in July could actually have been to blame for the significant stock market falls that were the hallmark of August. Mr Biderman said the drop "likely sparked the dislocation in the equity markets in the summer". He also believes, however, that the worst could now be over. "Assuming market volatility does not spike again this month, the worst of the selling in the hedge fund world is probably finished," he said. - Src - The Telegraph

Redemptions for July would have been made in May or June so this theory would make sense, If you knew that you were having large redemptions coming within the next 30 - 60 days it would make sense to sell off some positions which could have exacerbated an already jittery market that was waking up to the sub-prime situation.

Recovery signs are there in the market with most still beating the drum about corporate earnings and economic outlook being OK, however, the credit squeeze could begin to have an affect with the next few months. If the banks are tightening their belts for corporates with good credit ratings, because of a bearish attitude to lending, then there are many companies who may feel the pinch lower down the pecking order. The problem here is, however, that this tightening of the belts may turn into a self fulfilling prophecy.

Its a little like saying you are not going to pay the milkman because you think he is not going to deliver your milk. You will be right in your assumption sooner or later, but right for the wrong reasons, you didn't pay so he didn't deliver. This is what the bank needs to be careful of; cutting off credit becoming the route of the problems they fear most.