Redemption effect to clobber hedge funds

Date: Thursday, September 27, 2007

Hedge funds are about to be hit by several billion dollars of withdrawals as a popular method of gearing up investment in the industry is reversed in the wake of its poor performance this summer. Fund-linked derivatives, which have been booming as investors pile cash into hedge funds, are likely to finish their quarterly reviews by the end of next week and, bankers say, many will trigger automatic redemptions. The redemptions come at a sensitive time for hedge funds, where investor sentiment is being closely watched for signs of panic selling. Big withdrawals could spark crises at funds investing in illiquid assets and prompt further selling pressure in markets dominated by hedge fund money.