Not only is the $43 billion number, um, impressive, but recall September was a dreadful month for many funds. Industry experts see more redemptions in the offing. Moreover, London is a bigger hedge fund center than the New York metro area, where the vast majority of hedge funds ply their trade, so the US figures considerably understate total withdrawals.
From the Financial Times:
Investors pulled at least $43bn from US hedge funds in September…
The data from TrimTabs Investment Research – which was to be sent to clients late on Wednesday – come as hedge funds are working to prevent far bigger redemptions by the end of the year, when many funds give investors a chance to take out money.
Withdrawals can lead to a vicious circle in the markets, as funds sell holdings to return money to clients, depressing prices and prompting further redemptions.
To prevent such an outcome, some hedge funds had offered to suspend fees if investors kept their money in until March, said Marc Freed, of Lyster Watson, which invests in hedge funds on behalf of institutional and private clients.
“Every investor fears other investors will pull their money and so they worry they will be at the back of the line if they don’t also pull,” Mr Freed said.
“Nobody will invest in anything illiquid because they think they may not survive long enough to see them rise in value.”
A fundraiser for a major hedge fund said the period “between now and December 1 is a sort of death march” for the industry.
The chief executive of a leading alternative investment manager said he expected the hedge fund industry to shrink by 50 per cent in coming months – with half the decline coming from withdrawals and half coming from investment losses.
Conrad Gunn, chief operating officer of TrimTabs, said the $43bn in September withdrawals would mark “the beginning of what we expect to be a series of outflows for the remainder of the year. We expect October outflows to be larger”….
The industry, which manages close to $2,000bn, has experienced outflows during only a handful of months previously, including a small outflow in April of this year.
JPMorgan Chase has estimated that hedge fund outflows could total up to $150bn over the coming year. As investors take their money out of hedge funds, the funds have to sell assets.
But because they use so much borrowed money, the amount of potential asset sales is far larger. For example, JPMorgan expects that an outflow of $150bn will lead to sales of about $400bn.
Note that leverage figure is disputed; I’ve read hedge fund industry surveys claims that hedge funds on average are levered only 1:1. But even if that lower figure were true, redemptions of $150 billion would generate sales of $300 billion.
The Financial Times has another hedge fund woes story today, this one the result of the Lehman bankruptcy:
A group of the largest US hedge funds has called on the Bank of England to intervene to free an estimated $65bn (£38bn) in assets frozen in London in the collapse of Lehman Brothers, warning that delays “could be disastrous for UK plc”.
The funds, through the Managed Funds Association, said the scale of the problem was so great that it could undermine bank rescue plans as tens of billions of dollars would be kept out of the market. It was also likely to lead to the failure of some fund managers, said Richard Baker, chief executive of the MFA….
However, the Bank said it had “no powers” to override the administration process. Administrators at PwC running Lehman’s London business have won court approval for a process to work out how much they hold in protected assets but have warned it could take years to finalise.
Steven Pearson, one of the administrators, told Bloomberg that clients had $45bn of investments held through Lehman’s European prime brokerage, with another $20bn in short positions, bets that shares will fall in price.
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Government underwrite the system by trillions. Hedge fund withdrawal a few tens of billions. Yarn.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aOb4n0deWmNU
EU leaders called for a global summit as soon as next month to rewrite the 1944 Bretton Woods accord that paved the way for Europe's post-World War II reconstruction and set up the institutions that oversee the world economy today.
“We had the emerging market crisis, we had the Internet bubble, now we have this massive crisis,'' French President Nicolas Sarkozy told reporters after chairing the first session of an EU summit late yesterday in Brussels. Europe insists on the “re-foundation of the international financial system.''
if withdrawal of 43 bln has this impact on markets, what will happen if hedge fund investors withdraw 30% of their funds…
withdrawals for October will be 379 gabazillion dollars
Stand Clear – the next CB bubble is about to blow.
The synthetic markets that the hedge fund world has been feeding for the last seven years is imploding. No buyers for growth only assets is the dream weaver nightmare. Too many buyers is the value investors’ nightmare.
Equities priced to return a real, risk adjusted rate of return through dividends and generate an increasing stream of cash flow through sustainable growth will provide the bottom, eventually.
It wasn’t long ago that the talking heads were marvelling at the elimination of volatility through the transfer of risk to those able to accept it. I laughed out loud at the time.
The speculative, unregulated hedge fund culture has made a mockery of the free, competitive market concept and must die.
I will not be surprised to see an eight multiple before this is over.
Anon 7:59 said
“I will not be surprised to see an eight multiple before this is over.”
I wouldn’t be surprised to see an 800 multiple when this is over. 800 times 50 cents in SP earnings! It is quite possible that SP actually loses money in 2009/10 -though energy companies should provide some boost.
What sort of P/E ratio do you put on SP500 with an “E” of zero?
anonymous 4:06AM:if withdrawal of 43 bln has this impact on markets, what will happen if hedge fund investors withdraw 30% of their funds…
Well, let’s put it this way: 43B was 2.2% of the 2,000B market quoted above (not sure if that’s US only). 30% withdrawal would be 600B and that will leave a mark.
Is that a lot? With all these numbers being thrown around daily it’s not at all clear anymore what is and is not a large amount of money.
‘Course they say the hedge fund (derivative) market is worth a notional value of now $590+ Trillion dollars. Kind of ridiculously high eh? Finally got a answer to why the fake number here:http://www.slate.com/id/2202263?nav=wp
Okay, at approx. 40 times the actual amount derivatives should have gone down more than up…43 billion times 40= minus $1780 billion dollars!! I think that is 18 trillion dollars..ahem? So why is the notional value still going up? btw, what does “notional” value mean anyway?
And why is Andrea Mitchell on the TV so much?
also, isn’t it true that withdrawals can only be done on a quarterly basis? So next withdrawal won’t be until next year?
pardon my math..the mac calculator doesn’t even go that high…172 something or other. The more it seems rarified and incalculable the more it seems like graft and corruption.
and i wanted to find an internship in the hedge fund business. definitely not a good time to do so.. :( hard times for master students.