Recent Stock Rally Could Trigger Hedge Fund Selling
Madoff affair sparks wave of applications for withdrawals from hedge funds
By NEIL BEHRMANN 13 January 2009
Disenchantment about the Bernie Madoff alleged fraud and poor performance has generated another wave of applications for withdrawals from hedge funds.
Several analysts are thus cautious about the rally in developed, Asian and other emerging markets in the past few weeks. They expect hedge funds to take advantage of higher markets and sell. Investors trapped in dud Madoff hedge funds need to sell other assets and withdraw from private banks that placed money with the alleged fraudster.
The expectation is that there will be withdrawals from hedge funds at the end of January for single managers and fund of funds that invest in hedge funds that allow investors to redeem with one month notice. There are also expected to be redemptions at the end of March for funds that require three months notice.
Investment losses and client withdrawals have already reduced total hedge fund assets to US$1.1 trillion at the end of December from its peak of US$1.9 trillion in June, estimates Morgan Stanley. Since the average hedge funds has leverage of two to three times its assets, the impact on markets has been extensive.
The extent of further withdrawals will depend on any further redemption restrictions, a growing fashion of hedge funds. The illiquidity of hedge funds, however, has caused investors to become irate and the restrictions are expected to merely postpone redemptions and discourage new investors from investing.
There are several examples of withdrawals from hedge fund unconnected with Madoff. They include: Och-Ziff Capital Management Group estimated that total assets managed in its funds fell by US$5.5 billion to about US$22.1 billion, reflecting market losses and withdrawals.
JD Capital Management LLC is liquidating its Tempo Master fund which had an estimated US$1 billion in the market, following losses estimated at more than 40 per cent. GLG, a large listed UK fund announced that it has suspended withdrawals from its Event Driven fund and has several funds with redemption restrictions.
High net worth individuals and executives in charge of wealthy family offices report that they are seeking to redeem US, European and Asian fund of funds. Several fund of fund managers and consultants confirm the reports adding that they fear that the Madoff crisis will cause an acceleration of outflows.
Numbers aren’t available yet, but the industry is waiting in trepidation for the release of Man Group’s December funds under management report tomorrow. The numbers of Man, the largest independent hedge fund manager, should reflect RMF, Man’s Swiss fund of funds division’s losses on Madoff investments.
Besides the Madoff fraud and fears that fund of funds aren’t doing their job properly, fears of investors include the following:
Fund of funds haven’t performed in the bear market when they were told that a diversified hedge fund portfolio would be a hedge against declines in traditional assets. Hedge Fund Research estimates that on average investors lost about 18 per cent in hedge funds last year, but other consultants estimate it could be as high as 22 per cent.
Discussions with private bankers, who tend to place their clients’ money in fund of funds rather than single managers, say that their investors are seeking liquidity in current uncertain markets. They want to be able to enter and exit swiftly from investments. The Madoff affair has raised concerns that fund of fund managers may be ignorant about more esoteric hedge funds and therefore undeserving of their fees.
Since investment banks are cutting back loans, hedge fund leverage and potentially higher returns will be much more difficult to attain.
There is pressure on fund of funds to cut fees in the current environment.
Most European fund of funds hedged against the dollar when they invested in US hedge funds. The dollar short positions worked when the greenback was weak and raised their gains. But last year they were hit by a double whammy of lower underlying hedge funds and currency hedge losses from a strong dollar.
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Recent Stock Rally Could Trigger Hedge Fund Selling
Madoff affair sparks wave of applications for withdrawals from hedge funds
By NEIL BEHRMANN
13 January 2009
Disenchantment about the Bernie Madoff alleged fraud and poor performance has generated another wave of applications for withdrawals from hedge funds.
Several analysts are thus cautious about the rally in developed, Asian and other emerging markets in the past few weeks. They expect hedge funds to take advantage of higher markets and sell. Investors trapped in dud Madoff hedge funds need to sell other assets and withdraw from private banks that placed money with the alleged fraudster.
The expectation is that there will be withdrawals from hedge funds at the end of January for single managers and fund of funds that invest in hedge funds that allow investors to redeem with one month notice. There are also expected to be redemptions at the end of March for funds that require three months notice.
Investment losses and client withdrawals have already reduced total hedge fund assets to US$1.1 trillion at the end of December from its peak of US$1.9 trillion in June, estimates Morgan Stanley. Since the average hedge funds has leverage of two to three times its assets, the impact on markets has been extensive.
The extent of further withdrawals will depend on any further redemption restrictions, a growing fashion of hedge funds. The illiquidity of hedge funds, however, has caused investors to become irate and the restrictions are expected to merely postpone redemptions and discourage new investors from investing.
There are several examples of withdrawals from hedge fund unconnected with Madoff. They include: Och-Ziff Capital Management Group estimated that total assets managed in its funds fell by US$5.5 billion to about US$22.1 billion, reflecting market losses and withdrawals.
JD Capital Management LLC is liquidating its Tempo Master fund which had an estimated US$1 billion in the market, following losses estimated at more than 40 per cent. GLG, a large listed UK fund announced that it has suspended withdrawals from its Event Driven fund and has several funds with redemption restrictions.
High net worth individuals and executives in charge of wealthy family offices report that they are seeking to redeem US, European and Asian fund of funds. Several fund of fund managers and consultants confirm the reports adding that they fear that the Madoff crisis will cause an acceleration of outflows.
Numbers aren’t available yet, but the industry is waiting in trepidation for the release of Man Group’s December funds under management report tomorrow. The numbers of Man, the largest independent hedge fund manager, should reflect RMF, Man’s Swiss fund of funds division’s losses on Madoff investments.
Besides the Madoff fraud and fears that fund of funds aren’t doing their job properly, fears of investors include the following:
Fund of funds haven’t performed in the bear market when they were told that a diversified hedge fund portfolio would be a hedge against declines in traditional assets. Hedge Fund Research estimates that on average investors lost about 18 per cent in hedge funds last year, but other consultants estimate it could be as high as 22 per cent.
Discussions with private bankers, who tend to place their clients’ money in fund of funds rather than single managers, say that their investors are seeking liquidity in current uncertain markets. They want to be able to enter and exit swiftly from investments. The Madoff affair has raised concerns that fund of fund managers may be ignorant about more esoteric hedge funds and therefore undeserving of their fees.
Since investment banks are cutting back loans, hedge fund leverage and potentially higher returns will be much more difficult to attain.
There is pressure on fund of funds to cut fees in the current environment.
Most European fund of funds hedged against the dollar when they invested in US hedge funds. The dollar short positions worked when the greenback was weak and raised their gains. But last year they were hit by a double whammy of lower underlying hedge funds and currency hedge losses from a strong dollar.
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