Hedge fund redemptions surge after losses - survey

Date: Wednesday, December 14, 2011
Author: Svea Herbst-Bayliss, Reuters

Hedge fund investors finally seem fed up.

After months of heavy losses, big and small clients asked funds to return $9 billion in October. That number is three times as large as the $2.6 billion (1.7 billion pounds) they pulled out in September, data from BarclayHedge and TrimTabs Investment Research show.

The dramatic jump in redemption requests shrank the industry to $1.66 trillion, its lowest level in nearly two years and well below its $2 trillion peak, the researchers said in a report released on Monday. The redemptions are the largest since July 2009 when $17.8 billion was removed.

Hundreds of hedge funds had a deadline for clients to pull out money in October and dozens of clients opted to use it after seeing five straight months of losses.

Even some of the industry's biggest stars like John Paulson, who have hit home runs with bets against the housing market and on gold, have sunk into the red. Paulson's main Advantage fund was off nearly 50 through the end of September and his investors had until October 31 to say if they wanted to exit.

And while a strong stock market rally helped put most managers into the black at the end of October, the gains did not last long with average losses of nearly 1 percent reported in November, industry data show.

"Investors seem to have lost patience with lackluster hedge fund returns," said Sol Waksman, founder and President of BarclayHedge.

For years investors gave their managers lots of time to let their strategies work. Now they are becoming less generous, especially as they debate whether lackluster returns can offset hefty fees where managers often take 20 percent of the gains and add on another 2 percent management, investors and managers have said.

Investors pulled $2.6 billion out of so-called long short funds that pick bet on and against stocks, the strategies where most of the industry's money is invested.

Macro funds which make big bets on currencies, interest rates, and commodities faced redemptions of $1.8 billion and funds specializing in emerging markets strategies saw investors ask for $1.6 billion back. Funds that apply several strategies to the same pool of capital, so-called multi-strategy funds, took in just over $1 billion in new money.

Meanwhile investors also slowly returned to merger arbitrage hedge funds, after pulling money out for months, the researchers said.

"This is the second-straight inflow in this strategy, which had considerable outflows in the previous 10 months, Leon Mirochnik, analyst at TrimTabs said. "These funds posted the heaviest outflow in the past 12 months at over $5 billion (31.8% of assets) while posting the second highest return out of all categories at 2.6%."