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 For example the fund could have in it's documentation that only 10% of the fund can be withdrawn in any quarter.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'.
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'.
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