Hedge Fund Redemptions ExplainedMany hedge funds have lost a significant percentage of their assets over the last 9-18 months. This mainly due to the following reasons:
- Overall negative performance in the industry, or negative performance within any investment class for that matter normally leads to additional redemptions.
- Many investors who have lost much less with their hedge fund investments than other investments are now using hedge funds as ATMs - withdrawing their investments to gain access to the much needed cash.
- More organizations are allocating 20-40% of their portfolios to cash overall, pulling out funds from all of their investments to meet this new higher strategic allocation.
- The uncovering of fraud cases on a monthly basis now within the industry is slightly lowering the level of trust within the industry and possibly slowing down further re-investments.
Almost 9 out of 10 of them predict a “very difficult year” for their industry, according to a new survey by the accounting and audit firm Rothstein Kass. And while many hedge funds beat the stock market last year (at least by not falling as much)—and are besting it again this year—they have lost a lot of investors (and their money), and the exodus continues.
The present gloominess contrasts with the upbeat attitudes of the past two years, even as hedge funds headed from the subprime-centric meltdown of 2007 into the broader, harsher storm of 2008.
Rothstein conducted this year’s survey in January, interviewing more than 220 senior hedge-fund executives managing at least $100 million and in many cases more than $500 million in assets apiece. So their answers freshly reflect the frayed nerves of the post-Madoff period and the uncertainty of a new year and a downward-sliding economy.
“The theory that hedge funds could generate strong returns independent of market conditions was put to rest in the last four months of 2008,” says Howard Altman, head of Rothstein’s financial-services practice and co-managing principal of the firm. That factor alone rocked an industry that for years broadly marketed itself as “absolute return,” meaning it billed itself as able to post profits no matter how the markets and economy fared. source
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