Hedge fund deleveraging over for now: HSBC Halbis

LONDON (Reuters) - The current wave of hedge fund deleveraging is over and the industry is set to see few further fund collapses, although some funds may yet suspend investor redemptions, a senior executive at HSBC Halbis said on Monday.

The spike in market volatility since the credit crisis began last year has been attributed in part to hedge funds rushing to reduce leverage.

This has been triggered by their own caution, by the need for investor redemptions, or because of pressure from prime brokers who provide financing for trading and settlement of trades.

However, speaking at the Reuters Hedge Fund & Private Equity Summit in London, Bill Maldonado, HSBC Halbis Capital Management's head of alternative investments, said the current wave of deleveraging seems to be over because prime brokers are now sitting on record cash balances.

"In discussions with other fund managers, with the prime brokers, it would seem to us that the deleveraging that was going to happen for the moment has happened," Maldonado said.

"Not only have people deleveraged but actually they have taken off risk on the cash portion of their portfolios.

"The vast majority of funds have actually got idle cash balances sitting at the prime broker that they could deploy tomorrow if they wanted to."

This could reduce market volatility and might mark the bottom for some assets hit by heavy hedge fund selling in recent months.

Meanwhile, although the hedge fund industry has seen a number of hedge funds run into trouble recently -- notably London-based Peloton Partners, which told investors last month it was liquidating two funds and shutting down -- Maldonado said he did not expect further major hedge fund blow-ups.

"I suspect there are one or two funds that have already encountered some difficulties and will at some point soon have to declare their intentions, as it were. I don't think they're going to be very big funds.

"Prime brokers on the whole are very, very switched on ...I suspect out of the hundreds of hedge funds that prime brokers are watching on their books ... I'd be surprised if more than one or two trip an alarm on a daily basis.

"Broadly speaking, they're not on red alert, I'm not even sure they're on amber alert."

However, he said more funds in strategies where conditions have been particularly tough, for instance fixed income, could suspend investor redemptions or limit outflows.

The current tough market conditions has already seen some funds bar investor exits in areas such as long-short equity -- generally viewed as more liquid than some credit strategies.

Last month Netherlands-based GO Capital Management blocked investor redemptions for a year because liquidity had dried up in the small and mid-cap stocks it holds.

"I think that's very situation specific. If you take vanilla hedge funds that have gates and have had assets in illiquid markets, I suspect we've seen the bulk of the usage of those gates for those types of funds," Maldonado said.

"However ... it's likely that there are funds that have lock-up terms that might suddenly come off, or they've had good performance and maybe the performance comes off a bit and suddenly people are wanting to redeem. So it's not impossible that you see some use of gates and other liquidity defense measures going forward."

(For summit blog: summitnotebook.reuters.com/)

(Editing by Jason Neely)