$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 In total $55bn was withdrawn with inflows in the same period of $23bn.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.

Hedge Funds - No Cold Turkey Yet

We start with a humble apology. Our post 'Redemption Song' was picked up by quite a few notable blogs and sites including a call last night from a delightful lady at Dow Jones Newswire. We weren't taking the mickey, we were just injecting a little humour...

The premise of the post was that redemption day (being the last 45 day notice for withdrawals) was upon us and there were rumoured to be tidal wave of redemptions coming to funds which could make the matter a whole lot worse. However, as pointed out by the FT, history doesn't seem to be repeating itself...not yet anyway.

Its only been a couple of weeks of course but I am yet to find a report on a mass exodus from hedge funds. According to the FT “there has been nothing like the level of outflows that accompanied market wobbles in 1998, 2005 and 2006.” The FT's explanation for this is that the changing dynamics of the industry have a lot to do with it. Diversified strategies and institutional investors in it for the long term have worked to calm the nerves of other investors. Also “The slow-burning nature of the subprime fallout has also given managers time to mop investors’ brows – while steering expectations downward.”

This could, of course, change in an instant and it could be that managers who have suffered large redemptions are keeping them quiet for the short term at least.

Another situation could be that hedge funds have just shut the doors. Most hedge funds have "lock-ups," a minimum period of time during which investors agree to tie up their money and not make any withdrawals. Once that period ends, investors generally can redeem their stakes as long as they give advance notice, usually 45 to 90 days before the quarter end. Although that cut-off has passed for many funds for the current quarter, investors can still put in requests to get their money out by year-end.

But there is a nifty sting in the tail in some of the funds and that is the 'Gate'. Basically it is a withdrawal maximum imposed on investors. For example the fund could have in it's documentation that only 10% of the fund can be withdrawn in any quarter. Clearly if you are not the first in, you have pretty much had it until the next quarter where, one would assume, you get priority on the withdrawal list.

According to a memo from law firm Morrison & Foerster recently issued to its clients, of the more than 9,000 hedge funds that currently exist, at least 2,000 are vulnerable to "runs on the bank" by investors.

Obviously at this early stage it is unclear whether this 'run on the banks' will happen as some funds have already posted big recoveries in losses. One thing is for sure, however, and that is that investors have now seen the vulnerability of some hedge funds. This may lead to investors cashing on their chips on a winning streak and waiting to see how the land lies before diving into the next 'big thing'.