Hedge fund funds are under pressure

Date: Monday, October 6, 2008
Author: Bloomberg News

LONDON - Funds of hedge funds will need to pull more than $100 billion before year-end to meet investors' demands for cash, exacerbating market drops as hedge funds sell assets, according to London's advisory firm Clontarf Capital.

"Certain funds of hedge funds in Europe are fearing redemptions of up to 25 percent of assets by the end of the fourth quarter," said Aoifinn Devitt, founder of Clontarf Capital, an investment consulting firm. "There has been a wave of liquidating and de-leveraging and this is likely to continue."

Funds of hedge funds are the largest investor group in the $1.9 trillion hedge fund industry, according to Chicago's Hedge Fund Research Inc. The funds account for about 42 percent of hedge fund assets, or about $826 billion, according to the research firm's estimates through the end of June. Many investors rely on funds of funds for access to managers, to reduce risk of losses on single-manager blowups, and for the ability to pull cash monthly as opposed to quarterly or even yearly redemptions at some hedge funds.

The deadline for redeeming from many funds by the end of this year was Sept. 30. Lehman Brothers Holdings Inc.'s bankruptcy complicates meeting demands for withdrawals because funds such as GLG Partners Inc. and RAB Capital PLC have assets that are now tied up in bankruptcy proceedings.

"Fund of funds are putting larger redemption notices than they may need come December, taking into account some funds may be gated and giving them flexibility to reallocate," said Taco Sieburgh Sjoerdsma, head of research at Liability Solutions, a London-based hedge fund consultant.

Hedge funds fell an average of 6.9 percent in September, making it the worst month for returns since Long-Term Capital Management Inc. collapsed in August 1998, according to the Global Hedge Fund index compiled by Hedge Fund Research. The index has dropped almost 12 percent for the year, putting 2008 on track for the worst yearly performance since the research firm started keeping records in 1990.

"All players are experiencing varying degrees of stress," Devitt said.