The bad news is in for hedge fund managers.
Come Dec. 31, many could lose up to one-quarter of their assets if investors indeed take back all that they've requested.
The final redemption window of the year closed on Nov. 30, and requests average between 20% and 25% of assets for the majority of hedge funds, said industry sources, based on their conversations with the managers in their portfolios and data bases.
That news comes on top of a performance decline of 16% as represented by the return of the HFRI Fund Weighted Composite index year-to-date through Nov. 30.
As a result, hedge fund assets are predicted to be between $1.1 trillion and $1.3 trillion at the end of 2008, a decline of 35% to 45% from June 30 and as much as 42% from the $1.9 trillion at the end of 2007, according to researchers at London-based Morgan Stanley in a Nov. 28 report.
Sources estimated that hedge funds of funds will on average see redemptions of between 5% and 10% by year-end, mostly because of client rebalancing and liquidity needs for institutionally oriented managers. These sources think that rate of redemption likely will be repeated in the first quarter as institutional investors continue to rebalance out of relatively better performing allocations, like hedge funds, to replenish severely depleted domestic and international equity targets.
Looking at the amount investors actually asked to be returned by hedge fund managers as of Nov. 30, consultant Michael Rosen said the situation is fairly grim.
“The working number for redemption requests is 25% from the managers I've been talking to. Managers think the actual rate will probably be less than this, but not a lot less,” said Mr. Rosen, a principal and the chief investment officer of Angeles Investment Advisors LLC, Santa Monica, Calif., which invests in hedge funds in discretionary accounts managed for the firm's clients.
“Managers still don't know for sure what the actual withdrawal will be because a certain percentage of the redemption requests are provisional. It won't be certain right up until the last day, Dec. 31, what managers will have to return when they reopen for business on Jan. 2,” Mr. Rosen said.
Hedge fund consultant Donald A. Steinbrugge had a slightly lower year-end hedge fund redemption estimate — 20% on average — but he said redemption rates will differ geographically, by client type and by strategy. Mr. Steinbrugge is managing member and founder of Agecroft Partners LLC in Richmond, Va.
He said European hedge funds likely will see higher withdrawals because of a greater concentration of high-net-worth clients and more use of leverage by funds of funds. By contrast, he said “the U.S. market place had approximately 40% less in withdrawals which is attributed to the large amount of assets institutional investors have invested in hedge funds both directly and through funds of funds.”