This article might answer some of your doubt.
Year-end redemption requests loom over industry
Fourth-quarter disruptions seen as managers sell positions to raise cash
SAN FRANCISCO (MarketWatch) — The $2 trillion hedge fund industry is bracing for a wave of investor redemptions after recent losses, investors and analysts said Monday.
Many hedge fund investors can withdraw money on Dec. 31. Some funds require that redemption requests be submitted 90 days ahead of time. That means requests have to be in by Tuesday. Other funds require 45 days notice, so there may be another round of withdrawal requests toward the middle of November.
Some managers have already been selling positions to raise cash to return money to investors. However, if redemption requests come in higher than expected, there could be another wave of selling and market disruption during the fourth quarter.
“The major impact is coming,” said Sol Waksman, president of BarclayHedge, which tracks assets and performance in the industry.
“If managers anticipate the amount of redemptions correctly, it won’t be a problem,” he added. “But a lot depends on performance in the last quarter.”
The industry is on course for its worst year of performance in at least a decade. If hedge fund returns recover, investors may become more patient and cancel some of their redemption requests before Dec. 31. But if losses continue, redemptions may be higher than expected.
“I suspect this thing is not yet over,” Waksman warned.
The hedge fund industry may have already experienced net outflows in August — partly thanks to redemption requests from earlier in 2008, according to Vincent Deluard, an analyst at TrimTabs Investment Research, which tracks investment flows in the market.
That doesn’t include the effect of big hedge fund losses that are expected in September.
See related story.Funds of hedge funds
One major area of concern is funds of hedge funds, which allocate investor money to a range of underlying managers.
Funds of funds are considered a more conservative way to invest in hedge funds because they’re more diversified and less likely to be hit by the collapse of a single manager.
However, funds of hedge funds lost 1.4% on average in August, leaving them down more than 6% so far this year, according to Hedge Fund Research.
Those losses are sparking redemption requests at funds of hedge funds, which then have to try to withdraw money from underlying managers to raise cash.
“Some fund of funds haven’t performed as expected,” said Ken Miller, a senior vice president at Greenwich Alternative Investments, which runs its own funds of hedge funds and tracks industry performance. “A lot of hedge fund investors are nervous right now, so cash is the best alternative for them.”
SFG Asset Advisors, which invests in hedge funds, has put in a lot of redemption requests in recent months to raise cash.
President Chris Jackson said he’s been worried that some of the underlying managers he invests with may get withdrawal requests from other funds of hedge funds suffering their own redemptions.
“There could be a fair amount of dislocation in the fourth quarter as redemptions come in,” he said in an interview.
Gates and freezes
When a lot of investors ask to withdraw money, some hedge funds freeze redemptions to give managers time to sell more illiquid assets to raise cash.
Others erect so-called gates, which limit the proportion of a fund’s capital that can be withdrawn by investors.
That may put funds of hedge funds in a tricky position. If they can’t redeem from underlying managers, they may not able to meet withdraw requests from their own investors.
“With redemption gates, there’s concern that people may get trapped in investments,” Waksman said.
“Funds of funds are taking a short-term approach — if they’re worried about redemptions, they will try to get out ahead of it,” he added. “But good luck, because everyone is trying to get out of the same door.”
