Hedge Funds May Sell $200 Billion More of Assets, Survey Finds

Date: Monday, November 24, 2008
Author: Saijel Kishan, Bloomberg

Hedge funds are about halfway done selling securities to reduce their use of borrowed money and may unload $200 billion more to complete the process, according to managers surveyed by Sanford C. Bernstein & Co.

The survey found that 63 percent of hedge-fund managers said the sale of assets to cut leverage was at least half completed. Twenty-three percent said the process was three- quarters finished, New York-based Bernstein said.

Hedge funds, which borrow money in an effort to increase trading profits, have been forced to unload assets to meet client withdrawals and tighter lending requirements. That has amplified losses in the stock and bond markets. The Standard & Poor’s Index 500 Index fell 38 percent this year through October, while hedge funds lost an average of 16 percent, according to data compiled by Hedge Fund Research Inc.

“We estimate that roughly $200 billion will be additionally unwound,” Adam Parker, an analyst at Bernstein wrote in a Nov. 21 report to clients. The survey was based on interviews in the first two weeks of November with managers of more than 65 hedge funds overseeing a combined $100 billion.

The amount of gross leverage used by hedge funds fell to 142 percent of assets from 175 percent in 2006 and 2007, the report said.

Some respondents said they expect deleveraging to continue as long as the Chicago Board Options Exchange Volatility Index, known as the VIX, remains elevated, Parker said.

The benchmark for U.S. stock options closed at 72.67 on Nov. 21. The day before, the index set a record of 80.86 when the Standard & Poor’s 500 Index of the U.S. largest companies slumped to its lowest level in 11 years. Before trading opened today, the S&P 500 dropped 46 percent this year.

Investor Withdrawals

Investors pulled $40 billion from the $1.5 trillion hedge fund industry last month and market losses cut industry assets by $115 billion, Hedge Fund Research said.

Fifty-two percent of managers surveyed said the process of investor withdrawals is complete and transfers of money to clients to be done by the end of the first quarter, while 41 percent said they think half of redemptions are yet to come.

Clients putting in 30-day notices to withdraw their money for the end of December may be a catalyst for further deleveraging, “a possible explanation for the recent steep selloff,” Parker said.

Hedge funds, private and largely unregulated pools of capital, have raised their cash holdings to an average of 31 percent of assets from 7 percent in the previous two years, according to the survey.

“Our conclusion is that increasing cash on the sidelines and quality, liquid stocks used as sources of funds will likely remain a significant issue in the near term,” Parker said.

Forty-two percent of hedge funds follow equity-market strategies, while 25 percent use an approach that seeks to profit from companies going through events such as mergers and spinoffs, Bernstein said.

About 16 percent of funds invest in emerging markets, 10 percent in fixed-income strategies and 8 percent is in macro, which trades everything from stocks to commodities, the survey said.

To contact the reporter on this story: Saijel Kishan in New York at skishan@bloomberg.net