Withdrawals, brokers, cause hedge fund liquidation

By Neil Behrmann

March 2009:- Renewed withdrawals and tighter prime broker controls are causing further hedge fund liquidation.  This in turn is contributing to renewed pressure on stock markets. The Madoff affair, unsurprisingly, has been an aggravating factor that has caused more investors to seek redemptions from the more opaque funds.

Wihdrawal estimates include a UBS Wealth figure that global hedge fund assets will decline by more than $190 billion in the first quarter from $1.4 trillion at the end of 2008 and $1.9 trillion at the end of 2007. It is still early in the year, but Morgan Stanley predicts that around $450 billion will be withdrawn from hedge funds in 2009 following redemptions of $600 billion in 2008. The withdrawals are coming from high net worth individuals, family offices and pension funds. Freezing of withdrawals, while helping funds temporarily, are a medium and long term disincentive for investors. Pension funds, which have to meet liabilities i.e. pay money to beneficiaries, have become acutely aware of the liquidity risks of alternative investments and are shifting more assets into more transparent liquid investments.

Prime brokers have also been tightening the noose, causing hedge funds already encumbered by withdrawals to deleverage. For every $100 million, $200 to $300 million securities and derivatives must be dumped.  Prime brokers are carefully giving funds ratings and poor performers with no incentive fees are finding it difficult to obtain loans to trade, according to brokers and fund managers. The subsequent liquidation , which played a considerable role in causing stock and other asset collapse in the fourth quarter and in recent weeks, has continued to undermine the market.



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