How Much Of The Hedge Fund Industry Is About To Get Chopped?

Oct 17 2008 | 8:32am ET

By Christopher Holt -- Recent estimates about the imminent shrinkage of the hedge fund industry have varied widely. So we asked one expert to help us cut through the confusion.

The Financial Times reports today that “U.S. hedge funds suffer heavy withdrawals,” with U.S. hedge fund investors pulling about $43 billion of capital out of the industry. Some of this, posits one expert cited by the paper, is a result of investors preemptively pulling money out in anticipation of a “run” on a fund and the subsequent closure of redemption gates.

Another insider told the FT that the hedge fund industry would shrink by 50% over the coming months with half of the decrease (approx. $500 billion) coming from withdrawals and half (another $500 billion) coming from negative returns.

Fifty percent is the highest in a string of recent predictions about the size of the global hedge fund industry. In the same FT piece, JP Morgan estimated that less than 10% of funds will bleed from the industry. Robert Elliot of asset manager Bessemer Trust told Thomson News recently that the number of hedge fund would be cut in half by the end of next year. Credit Suisse expects the industry to shrink by a 33% in the next two years (UBP concurs).  And the Tabb Group says the second half of 2008 will see a 15% reduction in the number of hedge funds.

While the growth numbers vary widely, they all have a negative sign in front of them. To get a better idea of the extent and potential effect of hedge fund redemptions, we contacted one of the keenest observers of the hedge fund industry, Nicola Ralston, former chair of the UK’s CFA Society, a recent contributor to and co-founder of PiRho Consulting.

AllAboutAlpha:  Will redemptions really be as bad as reported?

Ralston: There is no easy answer to this one. Clearly many individual funds are suffering from very large redemptions and will have to close as a consequence.  One option for these funds is to split into two different funds, one of which is liquidated in as orderly fashion as possible while the other continues with some kind of lock-in and/or fee reduction. Continue Reading The Interview On AllAboutAlpha


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