Massive hedge fund redemptions feared

Oct 1, 2008 @ 11:21 am

By Jeff Benjamin

The $2 trillion hedge fund industry could be forced to unwind and liquidate major positions in an effort to meet what is expected to be above-average levels of investor redemption requests.

The implications of a redemption wave could place the hedge fund industry in the position of indirectly applying a major drag on the financial markets.

“Redemptions will always depend on the hedge fund manager or general partner,” said John Van, Nashville-based chief compliance officer for Greenwich (Conn.) Alternative Investments LLC.

In the context of current market mayhem, much emphasis is being placed on the significance of Sept. 30, which was a window for redemptions.

However, as Mr. Van explained, hedge fund offering memorandums typically provide the general partners with a lot of discretion with regard to redemption requests.

While some hedge funds do offer monthly liquidity, others might impose lock-ups of a year or more. And most redemption requests have to be placed a few months in advance.

One other thing that might temper the much-hyped potential flood of hedge fund redemptions is the fact that most hedge funds are already sitting on a lot of cash, so investors might be just as well off leaving the money inside the fund.

“Right now there’s no place to go that looks very friendly,” said Richard Baker, president and chief executive of the Managed Funds Association in Washington.

Because of the nature of hedge fund reporting, the actual impact of this week’s redemptions and redemption requests won’t be known for a few weeks, most likely after any ripple effect on the financial markets.

“Some of these hedge funds are trying to get their investors to be patient and they are trying to raise cash,” said Ryan Tagal, direct of hedge funds at Morningstar Inc. in Chicago.

There is at least a two-week lag after the end of a month before the databases can gather enough hedge fund information to present any kind of meaningful estimate on performance and asset flows.

But Mr. Tagal is already bracing for some dismal September data.

“September could turn out to be one of the toughest months ever in terms of hedge fund performance,” he said.

In August, the Morningstar 1000 Hedge Fund Index was down 3.1%.

This compares to a 1.4% gain for the Standard & Poor’s 500 stock index over the same period.

Hedge fund performance reporting is voluntary, and Mr. Tagal is already anticipating there will be some extra nudging required on the part of the data-gathers to get hedge funds to share their performance numbers for September.

“It will be interesting to see how fast the reporting for September comes in,” he said. “I would imagine the last thing hedge fund managers will want to be doing is going to a database to report their performance.”

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