Hedge fund managers brace for a flood of redemption
Updated: 2008-10-01 07:11
(HK Edition)
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Hedge fund managers are bracing for a massive wave of redemption requests with another quarter of miserable performance coming to a close and no end in sight for the global financial crisis.
Hedge funds are sitting on record levels of cash in expectation that investors will ask for their money back by Sept 30, the deadline for most funds offering monthly and quarterly redemptions, industry executives said on Tuesday.
Asian funds are especially vulnerable given steeper losses than their US and European counterparts and the flight to safety by big global investors.
"The European and Japanese investors, in tough times, always take away money from the periphery... Many will leave the region, and many will leave emerging markets," said Jim Walker, managing director of Asianomics, an economics consultancy.
Walker said hedge funds may have to sell billions of dollars more in assets to meet redemption notices, and recommended investors to avoid Asian stocks for now.
"You must not buy into redemptions of the size that are coming," he said.
Recession fears grew and investors raced for safe havens on Tuesday after US lawmakers' shock rejection of a $700 billion rescue plan for the financial industry. On Monday, Wall Street saw its biggest fall since the 1987 crash.
Given the spate of bad news, executives said they could only guess at redemption levels for the industry, which managed more than $1.93 trillion globally at the end of the second quarter, according to Chicago-based HFR Group.
But Asia-focused managers were expected to be among the hardest hit. The HFRI Emerging Markets: Asia ex-Japan Index was down more than 20 percent year-to-date at the end of August, among the worst of any sector tracked by the firm.
"I heard a figure, 10 percent, but I'll be honest. That feels a little light considering the action we're seeing," said one Hong Kong-based prime broker with a major bank, on conditions of anonymity to speak more freely.
"It will get magnified in Asia a bit because we've got the country specific, China, South Korea, type of funds that have not done well. Talking to some of the Greater China funds, they're resigned to fairly hefty redemptions."
The executive said he'd seen data showing some single-country funds were down as much as 15 percent in September and off 30 to 40 percent for the year. Hedge funds, which typically charge performance fees of 20 percent, are supposed to make gains in both rising and falling markets.
Given the risk of redemptions and climate of fear, the executive said he'd never seen hedge funds carrying higher levels of cash. He said many managers had cash levels of 20 to 30 percent in August and he spoke to one hedge fund last week that had 70 percent in cash.
Merrill Lynch said in a Sept 29 research note that hedge funds have been cutting leverage and held a record cash balance of $184 billion in August.
Not all investors are jumping ship. Analysts said some major investors like pension funds, which allocate just a small portion of their portfolios to hedge funds in a bid to diversify risk, are less inclined to redeem.
"For our clients, they're not looking to pull money out of the hedge funds at the moment. For them, it really is a long-term investment," said Anthony Chan, principal investment consultant with Watson Wyatt Worldwide. "The current time is definitely testing their beliefs."
Reuters
(HK Edition 10/01/2008 page2)