Hedge Fund Losses Lead To Redemptions
Kurt Brouwer September 3rd, 2007
Over the past couple of months, investors have seen the dark side of hedge fund investing. Hedge funds have liquidated for pennies on the dollar, others have frozen redemptions and others have simply lost money as the subprime lending mess spread across the credit markets. William Hutchings at the Wall Street Journal reports that this may lead to accelerated redemptions as the year winds to a close [emphasis added]:
‘Investors have begun selling their stakes in hedge funds at a discount as August performance figures reveal it was the industry’s second-worst month in nearly a decade.
The global hedge-fund investable index, which has been published by U.S. data provider Hedge Fund Research since January 1998, showed a loss of 3.2% for August. The worst month on record was in April 2000, when the index came in at minus 3.9%.
Investment consultants said the selloff comes as a warning to hedge-fund managers to anticipate a net outflow of capital during the second half of this year. The sales could force hedge funds to unwind their positions and trigger fire sales of assets…’
As we saw in today’s first post, Global Stock Funds Up — U.S. Stock Funds Down, investors move money in and out of mutual funds and other investments all the time. Often, investors time the move badly, taking money away from a portfolio manager just when there are lots of great buying opportunities. Nonetheless, it is a fact of life.
In the case of hedge funds though, there are additional problems, one of which is leverage. Many hedge funds multiply their buying power by borrowing money and investing much more than they have in investors’ capital. In addition, hedge funds often concentrate their positions so selling can difficult in a short period of time (see here for more).
Finally, some investments–particularly those backed by mortgages–may not be saleable at all right now. Add it all up and you have a big potential problem. That is, a concentrated position that is also highly leveraged in securities that may not be very liquid–the infamous triple whammy.
- Hedge Funds , Investing , Money , Mutual Funds
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