Anxiety is sweeping the hedge fund industry before a crucial deadline on Saturday, when investors angered by recent heavy losses are expected to demand the return of billions of dollars.
“Managers have a pretty good feeling for what is coming, and there are significant redemption requests out there,” said Stewart Massey, founding partner of Massey, Quick & Co, an investment consultant that puts money into hedge funds.
Saturday is the last day for thousands of investors to notify hundreds of hedge funds if they want their money back by year’s end.
Hedge funds that require three months notice from investors who wanted to exit by year’s end had a similar deadline on September 30 – also known in the industry as “D-Day.”
More such deadlines loom for funds that allow investors to give less notice before taking their money out, fund managers said.
In the last two days, several prominent fund managers made public predictions that illustrate the depth of gloom now sweeping the $US1.7 trillion ($2.6 trillion) hedge fund industry.
Pension funds, endowments and wealthy investors have put money into hedge funds so quickly that industry assets have doubled in about three years.
Hedge funds are nursing their the worst-ever losses, with the average fund down 15% this year, and many investors are punishing the managers for lousy returns.
The flood gates are about to open.
George Soros, an industry elder statesman who emerged from retirement at age 78 to protect his fortune at Soros Fund Management, said he expects hedge fund industry assets “will shrink by between 50% and 75”.
Daniel Och, who runs Och-Ziff Capital Management Group, told analysts he expects investors to run for the exits soon. The same goes for Wesley Edens, the head of Fortress Investment Group’s, who is also bracing for redemption notices.
“We expect to experience increased redemptions at year end” in our liquid hedge funds, Edens told investors on a conference call on Thursday, adding that he expects the pace of redemptions to remain high next year.
Even though hedge fund losses are less than mutual fund losses, wealthy investors said they are disappointed because hedge funds have been just as vulnerable to market declines. They are also tired of the long lock-up periods and lack of transparency in the funds, several investors said.
In October alone, investors pulled $US100 billion from the loosely regulated funds, according to hedge fund data tracker, Eurekahedge. And investors expect that number to keep rising in November and December.
Even fund managers who have not posted poor returns are being punished.
Jeff Gendell, an industry star who had delivered average annual returns of 39% since 1997, said redemptions at other fund firms are causing a “cascading effect” as people try to reposition themselves in the market. In turn, his own funds suffered such heavy losses that he decided to close two portfolios.
Some large hedge fund managers are also being hit with redemption notices from endowments and pension funds that have been forced to reshuffle their portfolios in the wake of sharp stock market declines. Many have to meet asset allocation targets, and with stock prices way down, they find themselves too heavily invested in hedge funds.
“We are definitely seeing a lot of rebalancing which has led people to redeem,” said Massey, the consultant.
Hedge funds may try to defend themselves against the liquidation wave by limiting the amount of money investors can withdraw at a time by either suspending redemptions or throwing down gates.
Lawyers for hedge funds have said dozens of managers are looking at how they can hold on to clients. Swiss hedge fund group Gottex Fund Management said Thursday it has temporarily suspended redemptions from funds of funds holding some 65% of its total assets.
With November 15 seen as a watershed date, some funds are sitting on a pile of cash in anticipation of meeting investor requests.
But some firms that did not plan as well may be forced to sell, managers said, possibly putting more hurt on an already-ailing market.
November 14, 2008
Source: The Age