Stock hedge funds sitting on their cash

Date: Monday, April 7, 2008
Author: Bloomberg News

LONDON - Stock hedge funds sat on a record amount of cash as the industry posted its biggest quarterly decline in almost six years.

Equity managers, who oversee about one-third of the $1.9 trillion in hedge funds, held an estimated $90 billion of cash in January, a hoard that dropped to $64.8 billion the next month, according to data compiled by Merrill Lynch & Co. The last time equity funds held cash outside of their trading accounts was in 2004, according to Merrill. At that time the Standard & Poor's 500 Index was up less than 2 percent through October.

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets, bet on falling as well as rising asset prices, and participate substantially in profits from money invested.

Hedge funds dropped an average of 2.83 percent this year through March 28, according to Chicago-based Hedge Fund Research Inc.'s Global Hedge Fund Index, which is updated daily with a two-day delay. If the decline holds, it would be the biggest in a quarter since a 3.85 percent drop in the second quarter of 2002 for HFR's Weighted Composite Index.

More than a dozen hedge funds have shut, frozen redemptions, or needed to seek outside capital this year as markets tumbled. Peloton Partners LLP liquidated its largest fund after making wrong-way bets on mortgage securities, while JWM Partners LLC, the investment firm run by ex-Long-Term Capital Management LP chief John Meriwether, was hurt by swings in Japanese government bonds.