Funds of funds raise cash for expected redemptions

By Svea Herbst-Bayliss

BOSTON, Oct 22 (Reuters) - Several large funds of hedge funds are trying to raise cash from individual hedge fund managers to satisfy their own clients' demands to get their money back, several investors said on Wednesday.

"People are desperate," said one investor in hedge funds who asked not to be named because he is still negotiating his own planned redemptions.

People familiar with the funds of funds' plans said many are asking for 15 percent to 20 percent liquidity and said their moves make sense at a time when investors are becoming increasingly impatient with the industry's worst-ever losses.

U.S. stocks tumbled to 5-year lows on Wednesday, with the Standard & Poor's 500 Index .SPX sliding 6.1 percent and the Nasdaq Composite Index .IXIC falling 4.8 percent.

The latest news about cash raising could easily add to fears that the sell-off could continue.

Funds of hedge funds had long been popular with wealthy individual investors and pension funds who relied on these middle men to help spread the risk of hedge fund investments by selecting a portfolio of underlying managers.

Essentially, the move is a preemptive step to get ready for what investors and managers say will be a flood of notices from investors who will soon demand their money back.

Most hedge funds require clients to give 90 days or 45 days notice to redeem their investments by quarter's end.

A flood of notices hit the industry at the end of September and even more are expected to arrive by Nov. 15, the day many people are already calling D-day for the $1.7 trillion industry.

In the third quarter alone, investors pulled out $31 billion from hedge funds as the average funds lost 8.85 percent, data from Hedge Fund Research show. The industry is now has roughly $1.7 trillion under management, down from $1.93 trillion at the end of June, HFR said.

Now they may be losing favor as investors, especially wealthy individuals, are leaving the industry, investors said. (Reporting by Svea Herbst-Bayliss; Editing by Andre Grenon)