Hedge Fund Chicken and Egg Problem

An article in Pensions & Investments reports data from Hedge Fund Research showing that hedge fund industry assets fell by $156 billion in October, with $115 billion from performance-related losses, and another $41 billion from net redemptions. Investors withdrew $22 billion in October alone.

Aren't redemptions, at least those above-normal withdraws, due to performance-related issues? Then again, redemptions are adding to the poor performance in what is becoming a "chicken or the egg" downward spiral. I guess it does not really matter which came first at this point. We are still left with a market that has laid an egg, and investors too chicken to buy (sorry, I could not resist). The quote of the day from the article: "HFR analysts attributed the outflows to investor dissatisfaction with under performance." Yes, it is true. Markets that are cut in half have a way of generating dissatisfaction.

Comments

[betasig588:]

Help me understand how net redemptions can be -41billion and then investors withdrew -22 billion?

2008 Nov 24 08:56 AM

[investment ...:]

The correct question should not frame this as a chicken or egg problem, but rather an effort to understand the fulcrum in a simple machine. What is the appropriate leverage and how will this impact de-leveraging...the size of the asset being levered versus the capital weight applied requires the fulcrum to be adjusted. If we assuming today's risk appetite is unchanged from last year, we can approximate the leverage pivot given asset value and capital deployed. Since we know risk appetite is less, and we know asset values have deflated, we can back into an approximation and forecast redemption levels.

2008 Nov 25 09:36 AM