Possible run on hedge funds tomorrow?

I posted this in the morning and no comments yet but tomorrow could be a huge kick in the teeth for hedgies although we may not see the effects for a few days

hedge fund trading will likely be suspended -- search the news

fortis and bainsly also going down

joe, I'm not even sure you can suspend hedge fund trading, but the bigger issue is folks who want to redeem their investments. That, has nothin to do with suspending trading.

u r right -- I meant redemptions

perfitz, you are looking at hedge fund redemptions far to simplisticly, hedge funds have been reducing leverage and going to cash for months in preparation for redemptions (or closing), perhaps the selling hit a crescendo today (perhaps not however). Its not like they didnt know redemptions were coming until the last day of the quarter...in fact most hedge funds, redemption notices need to be in the week before the end of the quarter, if they even take them quarterly. that being said many hedge funds will not make it to 2009 due to their clawback provisions making it unjustifiable to stay in business. Many hedge funds also have the ability to put up a "gate" and not allow redemptioms...

petrfitz, a hedge fund are like a new dev condos. They'll go bankrupt before they return their investor's money. There's no financial incentive for either entity to return money prior to bankruptcy. It's called risk. It's what you accept in exchange for return.

What's likely to happen is the hedge funds won't get overnight credit at any rate and will have to de-leverage and sell assets. Which would be ugly all around (see: Amarath for an example).

One more thing to add to the list of things perfitz doesn't understand...

hedge funds are private investment corporations without any regulatory oversight, without any common set of rules or conventions. Each fund has its articles or incorporation and bylaws and either you agree with them or you don't invest. They are not mutual funds. You can't redeem your shares just because the market moves against you. Sometimes funds will return assets if they get too big to invest all of their money. They certainly don't let investors take money out on the way down (c.f. Long Term Capital).

True. Redemptions occur at quarter end for many funds. Though the request for redemption may have come in any time over the last few weeks. So most of them have some heads-up. Imagine what that does to asset values over the next couple of weeks as they deleverage even more. I'm more worried about funds-of-funds -they are more of good-weather-friends than the usual investor. Lock-in-periods will be insufficient for the market on average.

I understand the incentives to own/manage/work hedge funds. The fee structure makes it hard to understand why u would want to invest in them

"why u would want to invest in them"
There are some good reasons you would want to invest in a hedge fund (Diversification near the top). Just like there are some good reasons to invest in real estate. The problem comes when everyone decides it is good to invest no matter what, and doesn't really understand why they are investing or at what price they should be paying.

As to the initial comment... Most hedge funds require at least one month notice to withdraw funds (after your initial lock up ends), so any money coming out tomorrow was in cash well before now.
And some funds actually did what they promised to do and actually made some money today.

80sman you really need to add lehman, ml and bear to your list of examples

"I understand the incentives to own/manage/work hedge funds. The fee structure makes it hard to understand why u would want to invest in them"

Ummm...why not? The Mgmt Fee is similar to Mutual Funds and the Incentive/Performance Fee only gets paid if you make money (which 90% of the HF's are not paying out this year)

Sound like accountability and transparency in pricing to me

I don't agree at all.

Because if they are taking major risk that make money in 9 of 10 years and explode in the 1 bad year, they will be overpaid through the good times. That is basically what happened over the last few years.

The analogy I like is someone who took money from 100 investors, bet 50 on red, 50 on black. The 50 red might be happy, but it doesn't mean the manager deserves a 20% cut.

There is no transparency in the pricing because there is no real transparency in the "performance". You don't know how much risk you are taking.

nyc10022 - you make a good point.

This is why private equity managers only get money at exit of the investment, and there's a clawback if the future investments underperform (in other words, there's a true-up for the entire fund for that fund's lifetime).

It's tougher with hedge funds. The theory is that the investments are liquid, so you're "choosing" to reinvest them at the end of each year, and should pay for the prior year's performance, regardless of what the future may bring. Further, in theory, a good fund manager will try to avoid a strategy that results in 9 good years and exploding in the 1 bad year, because they'll never raise money again. However, that's theory.

In reality, there have been way too many hedge fund managers and investors who got enamored with great risky/leveraged returns and forgot about the drivers of those returns - namely the risk and the leverage. They also enjoyed the 9 good years so much, they forgot about the possibility of that 1 really, really bad year. For many, 2008 is it.

The analogy I like is VCs. In 1996-2000, there were way too many VC's making very stupid investments (and sometimes making $$ on them, because the market was even stupider). After the shakeout, the VC model still generally works, and there are some successful VCs, but it's nowhere near the glory industry it was then. My suspicion is that something similar will happen with hedge funds in the next few years.

Most redemption gates often impose limits on withdrawal amounts -- the percentage of withdrawal as compared to that investor's position or overall pending requests to withdraw by investors. Funds sometimes also have the discretion to suspend redemptions. That may slow the tide of hedge fund investors pulling money out of funds.

Here is a link with the same concerns:

http://uk.reuters.com/article/fundsNews/idUKLNE48T03U20081001

I guess we will see what happens!

first looks are pretty dramatic. we are holding on for a rough ride. seriously this month was one of the roughest yet. systematic deleveraging, redemptions and poor performance i expect will lead to very few funds who come out the other side. certainly a month which will define a different hedge fund industry.