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.