Funds post largest outflow since 2000 - TrimTabs

PHILADELPHIA, Sept 3 (Reuters) - Hedge funds, with a combined $1.9 trillion in assets, posted the largest drop in investments since 2000 in July and a deeper slide could be seen in August, a research firm said on Monday.

Withdrawals for all hedge funds totaled $32 billion in July, according to the TrimTabs BarclayHedge Fund report. August hedge fund outflows, for which complete data is not yet available, could be even greater, according to the report.

Funds that invest in hedge funds suffered $55 billion in redemptions in July. That was offset, somewhat, by an inflow of $23 billion at regular hedge funds, TrimTabs said.

The redemption at funds of hedge funds in July was equal to nearly 5 percent of their estimated assets, the report said. The drop in investments "likely sparked the dislocation in the equity markets in the summer," the report from TrimTabs said.

Stock-market turbulence began for hedge funds that dealt with subprime mortgages and financial sector stocks, but soon spread to hundreds of funds that traded in a broad range of equities.

"We believe de-leveraging and risk reduction by funds of hedge funds was a major cause of the turbulence in the credit markets and the equity markets in July and August," Charles Biderman, TrimTabs' chief executive, said in a statement.

"Assuming market volatility does not spike again this month, the worst of the selling in the hedge fund world is probably finished," Biderman said.

Hedge funds were once the bastion of wealthy individuals, but pension funds and other institutional investors have become active investors as they seek to boost their returns.

The loosely regulated investment portfolios often promise to make money in all market conditions, through techniques like borrowing money and betting on stocks falling.

TrimTabs said most hedge funds require a 30- to 60-day redemption notice, and therefore requests for July redemptions actually began in May and June. The drop in global equity markets that began during the week of July 23 started when several funds said they could not meet redemption requests, TrimTabs said.

Due to the advanced-notice required to redeem funds, hedge funds knew in August what the amount of funds would be pulled in September and October.

"Therefore, more massive de-leveraging in the hedge fund world is unlikely unless something deemed unexpected bad news materializes this month," Biderman said. (Reporting by Jessica Hall)