Wednesday, December 3, 2008

Hedge Funds Overwhelmed by Redemption Requests, Uh Oh

Speculation has mounted in the past month about the number of hedge funds that would be forced to close their doors due to poor performance.  Hedge funds were supposedly bracing themselves for record redemption requests from investors by hoarding cash.  Noted hedge fund managers, such as George Soros, were making dire predictions about the industry shrinking drastically.  Now that the year-end is upon is, it appears as if the shrinkage may have been understated.  The past couple of days have been littered with headlines announcing that large hedge funds had halted redemptions due to an overwhelming amount of requests for capital withdrawals.  What's even more curious is that hedge funds with relatively decent performance have had to act to halt redemptions in order to keep from penalizing the investors that wish to stay in the fund.  Yesterday's announcement by Tudor Investments of its intent to halt redemptions was a bit of a surprise.  Tudor investments was only down 5% so far, a screaming outperformance of just about every single asset class with the exception of John Paulson (Paulson is his own asset class.)  Redemptions in Tudor Investments were halted so that the firm could avoid having to dump all of its liquid assets and leave its loyal investors holding a bunch of illiquid crap.  Perhaps the securities were liquid at some point, but not anymore, which begs the follow-up question: Is the fund really only down 5%?  
Today brought a string of similar headlines from hedge funds.  Fortress halted withdrawals from its global macro fund after it received requests for $3.51 billion, or nearly 50% in withdrawals.  The Fortress Global Macro Fund might ring a bell to my regular readers.  Back in August, I wrote about the manager of that fund receiving a $300 million share grant from Fortress, to keep him from leaving when the fund was already down 12% on the year.  Equity holders in FIG who may have been irritated at being so heavily diluted just to keep someone "motivated" can at least take some comfort in the fact that his $300 million grant is worth a heck of alot less today.
Dealbreaker had post after post today of funds posting lousy performance numbers and announcing halting of redemption requests, names including Farrallon and Highbridge, two of the largest and most well-respected funds in the hedge fund community.  I shudder to think of what we're going to hear in the redemption department from Citadel, which was already down nearly 40% on the year.  
All of this frantic pleading for a return of capital makes me ponder who wants their money back and why?  In particular, why all the redemption requests from funds that have performed reasonably well?  The obvious suspects are the pensions and endowments that have contributed to the hedge fund boom of recent years by increasing allocations towards alternative investments.  Clearly they are getting killed and need to raise cash to meet obligations as the value of all of their investments has fallen across the board.  If that is the case, then really, the hedge fund redemption frenzy will probably be over by year end.  Lots of shops will close, and those that are still standing will be able to buy assets on the cheap.  What concerns me is that the answer is far more ominous.  It's possible that many of the redemption requests are coming from rich people who are blowing out.  One of the things about this downturn that has been somewhat interesting is the number of very wealthy people that have been forced to liquidate stock holdings because of excessive personal leverage (Sumner Redstone and the CEO of Chesapeake to name two that come to mind.)  While it may be the case that wealthy investors are pulling money from hedge funds because they are worried about the market and the economy, it may also be the case that they really need the money.  Perhaps they got a little over extended, they have loans to repay, can't sell any one of their houses, have watched their stocks crater, have contemplated selling the family jewels, and frankly, they just NEED SOME CASH.  I suspect that a nice Fannie Mae conforming loan with a 4.5% interest rate is not even going to begin to solve their problems.          


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