Look Out for Bloody Tuesday

Posted by: Matthew Goldstein on September 26, 2008

There’s no relief these days for stock investors, who’ve already seen their portfolios get pounded by the fallout from the now 13-month long credit crisis. Now there’s a new worry for average investors: Bloody Tuesday, which is the deadline for hedge fund investors to put in requests to get their money back by year’s end.

With so many hedge funds—including some very large ones—posting negative returns this year, there’s a big fear that wealthy investors and pension funds are itching to take some money off the table. Many funds limit redemptions to four times a year in order to give managers breathing room to navigate choppy markets. But in order for an investor to qualify, managers generally require investors to submit a request 90 days before the end of the quarter.

Already, the redemption requests have been pouring into hedge funds well ahead of the Sept. 30 deadline. But it’s not uncommon for investors to wait until the last moment to submit a redemption demand. Sources say at some funds investors are seeking to recoup about 10% of their money, which is relatively high. The trouble is that most managers don’t keep too much cash on hand. To comply with their investors wishes, hedge fund managers may have to start selling lots of stocks—a move that could push equity prices even lower in the coming months.

It’s important to note that hedge fund managers don’t need to start selling right away. The 90-day window gives them an opportunity to try and persuade investors to change their minds. If stocks were to rally in the coming weeks, some investors might be convinced to sit tight and keep their money put. But with so much turmoil in the credit markets and uncertainly surrounding the health of the banking industry, a big year-end stock rally looks unlikely.

Right now, things look ugly for hedge funds, which control nearly $2 trillion in assets. The average hedge fund was down 5.8% going into September, which has been another brutal month, according to The Barclay Group, a hedge fund tracking service. The performance is even worse for so-called hedge fund fund-of-funds, which spread investor money between lots of different funds. Through the end of August, the average fund-of-funds was down 6.6%. Sol Waksman, Barclay Group’s president, says this is the worst period for hedge funds he’s ever seen.

A flood of year-end redemptions won’t only mean a tidal wave of selling by hedge funds. It also could lead to outright liquidations and closings of funds. So far, the number of hedge funds that have closed shop isn’t much great than in past years. But many in the industry are bracing for a wave of fund closing, especially smaller funds with under $2 billion in assets. In the current environment, it’s harder for smaller hedge funds to raise money and keep the investors they already have from leaving. Small fund-of-funds also may roll up the carpet.

In short, the next three months could be a blood bath in the hedge fund world.

Reader Comments

Snoz

September 26, 2008 2:20 PM

Dear Brother and Sisters, the time has come for our prayers. On our knees or even prostrate ourselves before the Almighty, let us repent and beg forgiveness because great has been our sinfulness and excesses. Life is short and time is running out. The day of Judgment is at hand. Reparation, Restitution and Retribution are now due. There is no escape. Like the death of traders of real estate papers, commodity traders and crude oil speculators now stand next in line to the guillotine when the hedge fund melts down. Ominously, The Grim Reaper's ugly shadow follows the crude oil traders at every turn. Fear, despair, and the gathering gloom have infiltrated the hearts and minds of hedge fund traders whose positions are steep in crude oil futures. Before receiving their wish for a merciful death, they will have suffered painful disgorgement, disembodiment, and dissection. My Brother and Sisters who worshipped no crude oil idolatry, let us do pray: In the Valley of Death we fear not, for if the Federal Reserve and Treasury are with Banks, Insurance Companies, and brokerage firms surely they will not forsake us. Surely they will lead us to Green pastures and calm water in gifts of $700billion as an infusion of faith. Blessed are we, the meek, for we shall inherit debts of our forebearers' sinfulness. Blessed are we, the beast of burden, for we shall be enslaved for 40 years to remove a mountain of debts for the Pharoah.

the dude

September 26, 2008 3:01 PM

SO it's oil's fault that WAMU made bad mortgage loans?

Ckgz

September 26, 2008 3:07 PM

Snoz

Well stated.

Squeezebox

September 26, 2008 3:14 PM

What a Christmas gift! Capital loss carryovers for years to come! And then there's the January effect, which will be even bigger than in previous years. Those who invest in the coming three months will be greatly rewarded for their courage. :)

Megan Marcengill

September 26, 2008 3:17 PM

Hello,


i really dont understand the big deal about this, Running from this isn't going to make it any better telling people to run is only killing the econamy!!

HI

September 26, 2008 3:53 PM

MUCH MORE TAXES AND SIGNIFICANTLY HIGHER INFLATION.

George

September 26, 2008 4:56 PM

Privatize the profits. Socialize the losses. So much for the myths of free markets in the good ol USSA.

Lots of investors assume heavy losses du to the manipulations of the SEC and ST Paulson.

What would be so difficult about just letting the free markets sort it out? It would if left alone to do so. But no. We are smarter than that aren't we? Time will paint this picture.

DTran

September 26, 2008 5:25 PM

I wonder where are the reporters of Business Week, Wall Street Journal, Fortune, Forbes who seem to heed the advice of the wisemen and few wisewomen on Wall Street. Why we have not heard the alarm from these magazines. They must be either asleep or bribed to look the other way.

Rick

September 26, 2008 5:58 PM

Snoz..well said.

However I believe a new world order is coming, so prepare for the Beast (666). Once the true source of our misery on earth (financial and otherwise) is revealed and vanquished, then we will truly find the promised land.

trillion

September 26, 2008 6:28 PM

US government print some more paper into money and solve the problems. A little bit more inflation follows, no big deal. If people do not trust Dollars any more, they can buy Yens or Euros.

Who knows how much Dollars are being printed everyday? Or even better, add a few digit more onto the money computer and everybody is happy. What does it matter? Once liquidity comes back, suck it out again to avoid too much inflation. It is so easy.

Nortenyo

September 26, 2008 6:34 PM

Megan...no one can hear you when you can't spell economy.

a.fish

September 26, 2008 7:31 PM

Lol, snoz =)

secluded

September 26, 2008 9:03 PM

Alright, I agree with Snoz - and love the presentation (quite witty & insightful), 100% I agree. But on the other hand, I got a wife, 4 kids (11,8,2,3 mo), a job of 10 years and a home of 4 years that we depend on very much. I used to "Fight the powah" - But we all do what we have to do. Is it really time for a meltdown? Will everyone rise up? Are we ready to start over? No, not yet. So let it be. If you want to provide for your families in 2 years - the bailout must pass. All out, or All in. Until its time, play the game. This is not the time.

DFox

September 27, 2008 12:58 AM

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September 27, 2008 2:18 AM


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jen

September 27, 2008 3:08 AM

Why is it not the time to rise up? whatever will happen might as well be on your shoulders or would you rather it be on your kids or grandkids? I agree with Snoz and apparently everyone does so why are we, the people, not taking this into our own hands? If everyone's pissed off enough why are we not doing something about it???? BOYCOTT BABY....everything you don't need and can possibly live without.

Grant

September 27, 2008 2:03 PM

Over-regulation killed the mortgage market, and the mortgage mess started the liquidity crisis. Who wants to over-over-regulate?
Let mortgage lenders loan only to those whom they, prudently, believe will repay them. If the rocket scientists want to wager on the repayment of very large slices of mortgages, let them take the loss. Vigorously prosecute fraudsters like Rains, Gorelick, et al.
What do we call 1000 nationalized finance bureaucrats at the bottom of the sea?

Best Minds

September 27, 2008 4:31 PM

After years of "XYZ today wrote off another billion in losses", the vast majority of Americans just take large numbers regarding losses and debt as though this is the way life has always existed throughout history. If we start to worry, we remember that Grandaddy Federal Reserve can create
out of thin air another 100 billion in order to buy collateral that no one else will touch, while telling other central banks around the world that they needed to keep buying this newfound "money" or the house of cards will be in deep trouble fast.

While the bailout will most assuredly pass, may we not forget our science. The faster you pour sand on a sandpile, the greater your chances of an avalanche.

TheTruth

September 28, 2008 8:13 AM

Secluded, 4 kids what were you thinking?

Sandy Williams

September 28, 2008 2:06 PM

What about us that never made to the buy out. Our mortage companies gave us a good deal it seemed at the time, pressured us into re-finance that we could not afford. Led us to believe we were getting a good deal. I had to file bankruptcy and foreclosure, I have worked a job for 40 years, my retirement , most of it down the drain. I now have no home, nothing to call a retirement, what happens to us that had to go ahead and take the fall? You are bailing out the banks,who is going to bail us out to afford another home for us middle class people?

ant to grasshopper

September 28, 2008 8:08 PM

Sorry Sandy. You and Wall Street reach grabbed for the sparkling prize dangled before you, ignoring risk. That turned out to be systemic risk, to your neighbors too. I sat eating cold oatmeal and watching my neighbors romp brazenly, shamelessly with their little consumer toys and joys -- their idiotic faith-based belief in their neo-American entitlement to a free ride -- damaging my birthright environment in the bargain. Now I, boring and homely, have a $429 monthly mortgage, and sleep well. Just because these scoundrels are well-connected enough for a bailout does NOT mean you also get to reach in my pocket for yet MORE for your folly. You already had your turn. Your road was paved with good intentions and willful ignorance. Maybe now you can greet the real God and a decent template for community and lifestyle, and not the shameless fake these "Masters of the Universe" will, suitably subsidized, continue to pursue.

joe lee

September 29, 2008 5:40 AM

All yall are nut! Especially Rick. He smokes a lot of weed, alright. Keep it real, man.

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About

Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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