BOSTON For hedge funds, August 15 may be D-Day,
when investors rattled by heavy losses demand their money back
from big and small portfolios alike.
"We are seeing a 'shoot first and ask questions later'
mentality among many investors," said Philippe Bonnefoy,
chairman of hedge fund advisory group Cedars Partners,
describing how everyone from the wealthy to chief investment
officers at endowments are now shunning risk.
Unnerved by heavy losses at some of the $1.75 trillion
industry's most famous offerings, including AQR Capital
Management, Highbridge Capital Management, D.E. Shaw and
Goldman Sachs (GS.N), many people want out before things get
But exiting can be a difficult process in an industry where
managers routinely lock up money for months, if not years, and
often require 45 days' advance notice before returning it.
To pull out at the end of the third quarter, investors will
have to notify their managers by August 15.
"Everyone always waits until the last second to get out,
and (Wednesday) is the last second," said Mike Hennessy,
managing director at hedge fund of funds Morgan Creek Capital.
Redemption notices began piling up weeks ago at hedge funds
that specialize in subprime mortgages after two prominent Bear
Stearns funds collapsed.
Now, what seemed like a contained problem has spread from
credit-focused strategies to a broad range of funds, including
one with a so-called market-neutral focus, that are not
supposed to see huge losses, analysts and investors said.
Market-neutral funds, which hope to exploit market
discrepancies by buying undervalued securities and taking an
equal, short position in a different and overvalued security,
returned nearly 6 percent during the first seven months of the
year, delivering some of the industry's more robust
performances. But the U.S. stock market's recent quick-paced
decline, followed by a brief rally and then more losses, erased
all gains and left the group with losses, according to
investors who have seen weekly numbers.
"I expect there will be a lot of redemptions in
market-neutral funds," said Andrew Fisch, a portfolio manager
for funds of funds at SSARIS Advisors. "The reality is, you
will probably see redemptions across the board."
Investors said that while the race away from risk is not
limited to hedge funds, it is being felt hard in this asset
Because hedge funds can use leverage, or borrowed money,
and sell securities short, losses can add up faster here than
in mutual funds, for example.
"No chief investment officer is going to get fired for
deciding to get out of hedge funds right now," Cedar Partners'
Bonnefoy said. "You can always reinvest later on."
Industry sources said it is impossible to estimate how much
money will leave hedge funds at the end of the third quarter,
but they agree the sums will be large. Hedge funds took in
$60.2 billion in new money during the first quarter, with funds
specializing in distressed securities, arbitrage and
event-driven strategies seeing the bulk of inflows, data from
Hedge Fund Research show.
The last time hedge funds suffered net outflows was during
the fourth quarter of 2005, according to HFR.
For the money coming out, there may be no better investment
options, investors agreed. "When people pull out because they
are scared, they go to cash," said SSARIS Advisors' Fisch.
But some industry advisors are urging people not to throw
in the towel quite yet because problems in portfolios will be
repaired. "While there are certainly funds that will suffer
now, I think when we look back on this period it will turn out
to have been a very good one for hedge funds," said Thomas
Whelan, chief executive of Greenwich Alternative Investments,
which tracks performance in the hedge fund industry.
(Reporting by Svea Herbst-Bayliss)