Friday, 28 October 2016
Last updated 1 hour ago
Sep 4 2007 | 2:00am ET
Hedge funds, with an estimated combined $1.9 trillion in assets, posted an outflow of $32 billion in July, the largest outflow since 2000, according to a report by TrimTabs Investment Research and BarclayHedge. August hedge fund outflows, for which complete data is not yet available, could be even greater, according to the report.
The report speculates that it was the estimated $55 billion in July redemptions by funds of hedge funds that likely sparked the dislocation in the equity markets in the summer. In July, while regular hedge funds experienced an estimated inflow of $23 billion, the $55 billion in redemptions by funds of hedge funds was equal to nearly 5% of their estimated assets of $1.2 trillion.
“We believe de-leveraging and risk reduction by funds of hedge funds was a major cause of the turbulence in the credit markets and the equity markets in July and August. Assuming market volatility does not spike again this month, the worst of the selling in the hedge fund world is probably finished,” said TrimTabs CEO Charles Biderman.
On a more positive note, redemptions should dwindle in succeeding months, barring another sub-prime-type negative event, which would mean good news for the equity markets, the report said.
Biderman, together with Sol Waksman, president of BarclayHedge, said that since most hedge funds require a 30 to 60 days redemption notice that requests for July redemptions actually began in May and June. Furthermore, the plunge in global equity markets that began during the week of Monday, July 23, started when several funds announced they could not meet redemption requests.
“Therefore, it is likely the fund of hedge funds requests for redemptions triggered the hedge fund unwinding that knocked more than $2 trillion off the market cap of the U.S. stock market and probably another $2 trillion off the market cap of non-U.S. stock markets,” said Biderman.
“According to hedge fund industry sources we contacted late last week, hedge funds knew by early August what the amount of redemption requests would be by the end of August for September and October. Therefore, more massive de-leveraging in the hedge fund world is unlikely unless something deemed unexpected bad news materializes this month,” said Biderman.