The Hindu Business Line : All eyes on redemption figure to be put out by hedge funds

Wednesday was the last day for most of the US hedge fund investors to notify the fund managers that they want to redeem at the end of the third quarter to September 30, 2007.

After collapse of two Bear Sterns funds, redemption notices began piling up weeks ago at some of the hedge fund desks that specialises in the sub-prime market.

Analysts here familiar with hedge funds practices said the figures related to redemption sought would only start emerging this evening. “But going by the indications, hedge funds may face greater than usual quarterly withdrawal requests. The apprehensions in the interconnected global markets are that heavy redemption might dry up liquidity more,” said an official with an FII.

Many hedge funds are understood to have already reduced borrowings and sold off in different markets to accumulate money in anticipation of heavy redemptions. US hedge funds, however, can prevent more than 10 to 15 per cent of assets being withdrawn in any quarter, overseas fund managers said.

Bear Sterns, Braddock Financial and United Capital Markets had already suspended repayments. On Tuesday, Sentinel Management sought SEC permission for suspension of repayment.

UBS AG closed a small fund. Elsewhere, in Australia, Basis Capital stalled redemption. Some money market or mutual funds have also resorted to suspension. Some hedge funds, have built in lock-ups and other stipulations that prevent a run.

Certain hedge funds, which have suffered losses in recent weeks, belonged to big groups such as Goldman Sachs, AQR Capital Management, Highbridge Capital and Management DE Shaw.

According to analysts, the funds, which have additional leverages, run the risk of amplified pressure. “Two breeds of hedge funds – credit funds, some with exposures in the US sub-prime mortgage market, and quantitative funds, which use computerised algorithms for trades – have been affected most in the recent sell-offs that have upset the standard statistical models.

Profits gone

Market neutral funds, which exploit market discrepancies by buying undervalued securities and taking equal short positions in a different and overvalued security and earned a decent 6 per cent return during the first seven months of 2007, reportedly have wiped out their profits in the last few weeks.

Interestingly, a research paper by Lehman Brothers, published early this month, said that the average quantitative fund – in the equity market neutral and statistical average categories – allowed withdrawal once in a quarter. But the average hedge funds across all strategies demand nearly six months’ notice, with recent investors locked up for more than a year, making a broad exodus impossible.

According to Hedge Fund Research (HFR), the US-based hedge funds took in $ 60.2 billion of fresh money during the first quarter to March 31, 2007. Funds specialising in distressed securities, arbitrage and event-driven strategies saw the bulk of inflows, HFR added.

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