Wednesday, December 31, 2008

Investors Continue to Bail Out of Hedge Funds

The fear of the markets was clear in November.

Investors pulled a net $32 billion from hedge funds last month, making 2008 the first year in their recorded history that the funds have had significant outflows and ending the industry’s 18 years of asset growth.

To understand how deep the fear was, keep in mind that money has been taken out of funds following every strategy, even those – such as macro funds – which were showing positive returns, according to data from fund trackers Hedge Fund Research.

Further, December redemptions appear to be two to three times the November number.

Conrad Gann, chief operating officer of fund tracker, TrimTabs, says the known December redemption number is already at $57 billion and could go as high as $80 billion.

The funds had outflows of $43 billion for the 10 months to the end of October. TrimTabs’ estimate of further significant redemptions for November and December indicates that the funds will show outflows of more than $100 billion for the full year. In 1994, the only previous time they had outflows, the figure was $1 million.

If you are looking for a reason that Treasury bills are trading near 0%, the hedge fund industry is a good place to start. With these kinds of resumptions coming in, the funds put money in the perceived safest possible instrument, Treasury securities, to meet redemption demands. Investors then get the money and put it right back into T-bills.

Once all the fear subsides, things should turn positive quickly given the enormous amounts of money Bernanke is pumping into the system. December 2008 could very easily be the bottom for markets. January could see huge upside action in the markets.


  1. Unfortunately the Madoff scandal has raised the likelihood that Congress will require hedge fund managers to register with the SEC which will be chilling for hedge fund start ups.

  2. Somehow I share the same thought as yours - Dec 2008 is more or less the bottom and from Jan 2009 onwards it should all be up and up. If the hedge funds always stick to the basic common sense approach of not becoming too greedy and leveraged, I think they would prove to be the catalyst for the much awaited recovery.

  3. @ FinanceFreak

    There's going to be an up move, but it is not going to be a "friendly" up move. It will be fueled by Fed money printing--and ultimately severe inflation.

    Hedge funds are really bit players. If the Fed prints they will end up with the money leveraged/or not. If the Fed doesn't print, there is no money around to leverage.