Hedge Fund Redemptions May Crash Q1 Markets 70 comments
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When reading about the $50 billion Madoff hedge fund fraud, it hit me on the head: hedge fund redemptions at the end of this year are going to be absolutely huge, and that will mean a massive sell-off in global capital markets in the first quarter.
That would also mean a further rally for the the US dollar, as assets sold are redeemed largely in US dollars and thus boost demand for the greenback. Gold might take a slight set back, although it will more likely be in increasing demand as a safe haven asset and diversification against the coming dollar crash.
Inflationary stimulus
All this turmoil would really put the pressure on the incoming US president and his team, who will respond with bigger than expected stimulus packages and bailouts. That will make the upcoming and inevitable inflation even larger when it hits, and at the first whiff of inflation the bond market will tank and with it the US dollar.
Investors face a double whammy in 2009 - from hedge fund withdrawals crashing the stock market and later a dollar collapse. That would take capital markets to a real bottom.
Market bottom
My prediction of the Dow at 4-5,000 and gold at $4-5,000 an ounce for later next year still stands, and hedge fund redemptions followed by a dollar collapse will be the driving forces to achieve that bottom. It might take until 2010 to get that far but no longer.
Now try to argue the reverse: will there be sellers or buyers in capital markets after year-end redemptions come in? What is the chance of a positive tally for redemptions? Zero chance! Is the dollar bond market at a top or about to go higher? Is it hell!
Actually this will offer a great point to buy up the finest US stocks at rock bottom prices, but who will have the cash to buy by then? Certainly not anybody taking an optimistic view of the market outlook now.
I can empathize with those who feel the Madoff fraud is some kind of a warning of things to come. These frauds do not usually happen in isolation and are a symptom of the underlying malaise.
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This article has 70 comments:
That's truly a johnny-come-lately, if there ever was one.
Are you aware that you usually cannot just ask for redemption of your hedge fund whenever you like or a Madoff hits? There are redemption periods and advanced notice requirements. which, btw. were the main drivers behind the huge selloffs in sep-november. most hedge funds have annual or quarterly redemption schedules with a 30-45 day advance notice. that means that anyone who wanted to redeem a hedgefund with annual redemption schedule per calender year would have to notify the fund by mid-November. If you didn't - then gl, you will have to wait for another year. similar with quarterly schedules.
ther will be soem Madoff-effekt, no doubt. but the expectation voiuced in this silly article is nothing but a moronic guess that displays the author's lack of knowledge and perhaps his whishes. but certainly it adds TERO alpha to anyone's portfolio.
what a complete joke
Lol
On Dec 22 08:09 AM User 305589 wrote:
> oh my god.
> That's truly a johnny-come-lately, if there ever was one.
> Are you aware that you usually cannot just ask for redemption of
> your hedge fund whenever you like or a Madoff hits? There are redemption
> periods and advanced notice requirements. which, btw. were the main
> drivers behind the huge selloffs in sep-november. most hedge funds
> have annual or quarterly redemption schedules with a 30-45 day advance
> notice. that means that anyone who wanted to redeem a hedgefund with
> annual redemption schedule per calender year would have to notify
> the fund by mid-November. If you didn't - then gl, you will have
> to wait for another year. similar with quarterly schedules.
>
> ther will be soem Madoff-effekt, no doubt. but the expectation voiuced
> in this silly article is nothing but a moronic guess that displays
> the author's lack of knowledge and perhaps his whishes. but certainly
> it adds TERO alpha to anyone's portfolio.
>
> what a complete joke
Secondly, for tax reasons if for nothing else, I would have already done my hedge fund withdrawal.
thirdly, there are a lot of stocks that have extremely low pe ratios and pay good dividends. What is your alternative? 0% T-Bills? I think that selective stocks look pretty good in this environment.
not guaranteed that will happen, but certainly something to consider
even w/an obama stimulus coming up
we'll see i guess :-)
On Dec 22 08:48 AM birder wrote:
> There is quite a lot of negative criticism of this post here, but
> I am not too sure that all of it is justified. I do believe he did
> mention 1st quarter withdrawals. That does allow sufficient time
> for a 45 day notice. Certainly, there have already been plenty of
> hedge fund withdrawals, but the point here is that as bad as everything
> is, the Madoff affair might very well make a few people wonder whether
> their money is safe anywhere other than under their matress. It makes
> me wonder that. I believe I read that Madoff is going to bankrupt
> the SIPC fund. Sort of makes one wonder whether one should remove
> ones funds from every brokerage account out there.
Tudor Investment Group had $5.7 billion invested at June 30 as disclosed in its 13-F. Its September 30 filing shows only $453 million.
Atticus Capital, another much-celebrated hedge fund, went from $8.1 billion to $510 million.
SAC Capital, run by the Steven Cohen, went from $14.4 billion to $7.7 billion.
Vinik Asset Management, led by Jeffrey Vinik, who once ran Fidelity Magellan, went from $11.8 billion to $1.8 billion!
These numbers are as of September 30. So they do not include the awful months of October or November, so current assets at these funds would be even lower now, but if you are already down 90% .... who cares?
The reduction is of course the combination of selling to meet redemption requests, and a decline in market value of existing positions, if these funds are anywhere close to "typical" I have to conclude that downward pressure on the market on a go-forward basis has got to be minimal as ... well as they are all pretty much out of money....?
We're - ALL FREAKIN DOOMED!!!!
The incoming USA Federal Government administrators are talking about pitching pennies into the welfare pot and building negative yield assets with them
Good Luck
and short term treasuries pay zippo but are selling out. This will provide cover for Obama and company to spend over another trillion to stimulate"
the economy throwing cash to friends and family in the first 90 days in office, then the hangover starts and inflation will come back with a heartless and rapid vengence.
So the 'cash on the sidelines' is not such a huge consideration.
"Thirdly, there are a lot of stocks that have extremely low pe ratios and pay good dividends. What is your alternative? 0% T-Bills? I think that selective stocks look pretty good in this environment."
The answer is bank CDs. The whole reason for zirp is to recapitalize the banking system by driving the money market holders into CDs.
You Best have already gotten your Gold and Silver NOW. The inflated balloon is going to start up and Folks I really do not see it coming down for a long, long time.
Oh and get some guns before the new Prez makes it so FREAKIN hard to get one you won't be able to fend off the others wanting to take it from ya.
What a mess - Helicopter Ben and his warped views on money and now a new Prez that is trying to out do him - with hedge funds imploding to boot and would not be surprized to see a freeze on pulling out funds or a staggering limit put on that.
Geeezzzzzzz
You Best have already gotten your Gold and Silver NOW. The inflated balloon is going to start up and Folks I really do not see it coming down for a long, long time.
Oh and get some guns before the new Prez makes it so FREAKIN hard to get one you won't be able to fend off the others wanting to take it from ya.
What a mess - Helicopter Ben and his warped views on money and now a new Prez that is trying to out do him - with hedge funds imploding to boot and would not be surprized to see a freeze on pulling out funds or a staggering limit put on that.
Geeezzzzzzz
When hedge funds receive redemption requests, does that obligate them to sell holdings immediately? Or can they cover the redemptions with cash on hand and sell when the timing is more beneficial to them?
I'm just wondering if all of the YE selling is done, even though all of the YE redemptions are done.
And so have mutual funds, which is ten times the size of the hedge fund industry.
A very severe recession is already priced in; the only possibility of a next leg down is if depression numbers start to roll in...
"I'm not very conversant with this subject, but it seems to me fatpitch has a good point. While redemptions forced large scale sales of assets and helped force prices very low, not so much cash has been recovered by the punters. The other 90% or so has gone into space.
So the 'cash on the sidelines' is not such a huge consideration."
With 30:1 leveraging in the investment banking (IB) business there are 30 phantom IB dollars in the system for every real dollar. The IB dollars that inflated asset values in hedge funds are debts that have to be repaid when those assets (collateral) are redeemed for real dollars. For every 30 IB dollars there is only 1 real dollar left after the IB debts are repaid. The whole system was little more than a gigantic trade of IOUs. IOUs were used as collateral on other IOUs.
If there is $30 trillion numerical asset value in IB inflated funds, then when these are completely unwound or deleveraged there will only be the original trillion left that the IBs started with. And if IBs got their capital as loans from commercial banks, then even this $1 trillion of capital will evaporate when those loans are repaid.
The whole derivatives system is built on inflated IB money that cannot be redeemed for real money because the IB money is mostly IOUs which is debt. To make redemptions in real money, funds have to sell assets that are not debt, like stocks or mortgages or other real value collateral-based loans. But if there was only $1 trillion of real money put into this system, then that's all you can collectively take out once all the IOUs are written off against each other.
There was a 30:1 bubble and everyone in it felt rich and a lot of people cashed out bubble money for real money. Maybe all the real money is already gone and there is net zero real value left in this system. That would mean a lot of people are swimming naked and the tide continues to go out.
Unless central banks start adding to their gold stocks rather than distributing gold via sales and leases the price of gold will continue to be controlled by JP Morgan and the Fed selling short on the Comex. With the price of oil as low as it is there is no Goldfinger who can move gold higher.
The purpose is to keep insurance companies solvent. However, at some point, this support will bebome unsustainable. At this junction, DOW will dive down with Gold jumping up (unless Obama will follow FDR's Great Gold Robbery.)
Unless we get a burst of hyperinflation, that can't happen. If you think otherwise, you're insane.
However, on the flip side of this argument, many endowments and pensions have a set mandate of how much equity exposure they have to hold. usually, these pensions will rebalance quarterly, semi annually, or annually. Many of these pensions and endowments have held off on rebalancing due to extreme market conditions. Also, they have been unable to rebalance due to a high weighting in non liquid alternatives. With 2009 coming in, there is the potential that many of these funds, who are some of the participants in the redemptions that we are discussing, will take that money and invest in equities or fixed income, depending on where their allocation currently is underweight.
While they impact of the pension rebalancing can be argued for hours, a large amount of this money is coming out of the hedge fund universe, and since there is a 30 to 45 day(in some cases, 120 day) redemption notice, that does give an argument to why there are such high cash levels.
So while this upcoming redemption period for quarter 1 may lead to massive waves of selling, it could just as easily lead to massive waves of buying. Nothing is certain. It is also important to note that even when you get in your notice to your hedge fund for a redemption, say 45 days in advance, of December 31st, you still may not get a check for your money until January 15th to January 30th. So the old trader's almanac for a January rally may end up being a February rally. Only way to find out is to stay tuned.
On Dec 22 09:54 AM applesauce wrote:
> Looks like the mattress is the best place for cash in the first quarter.
> Many "experts" are calling for a rising dollor against other currencies
>
> and short term treasuries pay zippo but are selling out. This will
> provide cover for Obama and company to spend over another trillion
> to stimulate"
> the economy throwing cash to friends and family in the first 90 days
> in office, then the hangover starts and inflation will come back
> with a heartless and rapid vengence.
All you nervous nellies are sdad excuses for human beings.
Gold at 4K? Dow down to 5K...IF and thats one of the biggest if's I have ever heard...not one single one of you is going to be happy to be alive.
Be very careful what you wish for.
What a dummy story. IT WILL NEVER HAPPEN NOT EVER.
On Dec 22 08:15 AM Herbert Hoover wrote:
> Add to the hedge fund withdrawals the Obama Plan that will enable
> each 401K participant to withdraw $10,000 without penalty and a Dow
> at 5000 looks more and more plausible.
We had a NASTY correction...money is being pumped in FAST...game over.
Thats it the bear market is over just not anyone here seems to have figured it out.
When the priniting presses around the world start going full tilt...those that control what you think you know will soon thereafter brainwash you via the media into thinking everything is ok again.
It will work and you will all go back to your regular buy and hold and live happily ever after.
A couple of you will get carted off to the funny farm and to those I say GOOD RIDDANCE you silly nervous nellies.
On Dec 22 09:25 AM investor88 wrote:
> Q1 2009 may be weak for the reason mentioned above, and other reasons
> of turmoil and economic weakness.
On Dec 22 10:42 AM gollwoods wrote:
> look, all this talk about investments is a delusion. we are going
> into anarchy, there won't be anyone buying anything they can't eat
> wear or kill with.
> I'm not up to speed on hedge funds, so excuse me if this is a silly
> question.
>
> When hedge funds receive redemption requests, does that obligate
> them to sell holdings immediately? Or can they cover the redemptions
> with cash on hand and sell when the timing is more beneficial to
> them?
>
> I'm just wondering if all of the YE selling is done, even though
> all of the YE redemptions are done.
1) While hedge funds could cover with cash if they had it, most don't normally sit on a lot of cash, so with 45-90 day advance notice required, most of the selling should have been done.
2) Someone mentioned gates prevented selling and therefore selling would resume in Q1. It depends upon the "gate: I've read where some funds have "two year" gates, so look for those funds to resume selling in Oct 2010, if they need to sell then.
3) There is apparently more than one aspect to the "safe haven" angle of the T-Bills/short T-Bonds. Some hedge fund managers have said they've liquidated what they could (ie, more than needed) and invested the rest in US Bills/bonds so that if they get additional re"dump"tions, they can sell the T-Bills rather than liquidate illiquid assets at what they view as unusually depressed prices.
4) There is "cash on the sidelines" (see 3). Even if the hedge funds don't have it, customers do. Sooner or later the fear (or recession or depression) will be over and whatever cash is out there will flow back to assets. This is especially true if the dire predictions of future inflation become true, although the assets being bought will be "hard assets".
There may be other reasons for a crash, but I'm afraid Mr. Copper's horse hasn't just left the barn, it died of old age, because in the speed of this market, hedge fund redemptions isn't "yesterday's news", it's last years.
On Dec 22 08:12 AM User 305589 wrote:
> sorry for the typos. was in a big hurry to reply to an article that's
> essentially total crap.
> Lol
On Dec 22 08:48 AM birder wrote:
> There is quite a lot of negative criticism of this post here, but
> I am not too sure that all of it is justified. I do believe he did
> mention 1st quarter withdrawals. That does allow sufficient time
> for a 45 day notice. Certainly, there have already been plenty of
> hedge fund withdrawals, but the point here is that as bad as everything
> is, the Madoff affair might very well make a few people wonder whether
> their money is safe anywhere other than under their matress. It makes
> me wonder that. I believe I read that Madoff is going to bankrupt
> the SIPC fund. Sort of makes one wonder whether one should remove
> ones funds from every brokerage account out there.
derrly made some interesting number crunching above. From my superficial and eclectic view, looking a the DJIA average chart over the past 30 years, it appears to me that the Dow at 2000 is the support level. Is this view credible? If so when will that happen? How, if ever, is the drop to 2000 related with derryl numbers. Calling all scholars.
Second thing is that funds will be sell gold at every higher price because of deleraging expected to be continue at least for sometime ..... only funds can make it possible if they are able to invest and ready to loss ....world economy mostly reduced the consumption capacity second thing selling from IMF (gold ) can take prices belwo the 600 ounce dollar....
ok gold stock can be rise between the time.. since they are always bullish , but the dollar expected to be recover very soon currently trading at 77 but it can be highe above 100 very soon and next year which will be the main reason of higher gold prices in future...... i am going to make my short postion from US$890-850 for short term target of US$690 and then US$590 ..........upside price can rise upto US$1080
I saw a news flash the Barclays got hit by Madoff.
Barclay holds or controls TSP.
Any comments about TSP. Safe or not?
Yes everyone, read this again, its fact:
LONG TERM CAPITAL GAINS TAX IN 2009 IS ZERO PERCENT
there will be redemptions for sure, but not near as severe as the last wave we saw.
while we can't argue *against the fact* that more redemptions are imminent,
sorry left that phrase out
Mutual funds might get crushed much more
on the other hand, a lot of big institutional investors are "underweight" equities (that's what happens when your investment loses 50%...) so could allocate.
If you still have free hands, PE/VC funds are making big capital calls and there aren't many (any?) realizations right now, thus the big IIs may need to raise cash to meet these calls.
More return => you are betting on risk premia
Risk premia are in proportion to the underlying liquidity; not much else is really involved
In good times, making stupid high leverage bets on low liquidity things pays off handsomely, and if your competitor is doing it and you aren't you get fired...
Today Cerberus Partners announced that it was returning ONLY 20% of the amount of investor redemptions (it has the right to limit redemptions)and is suspending redemptions for up to one year.
So, as I said, some gates are up to two years - Cerberus just lowered it's one-year gate.
Also, like I said, Cerberus does not want to liquidate at what it believes are "unusually depressed prices". It had, in fact, just made a big bet on mortgages in Sept and while it admits it is wrong, it still believes the prices are too cheap to sell.
One thing I did NOT know: it doesn't even have to meet the redemption requests - ergo, it's giving 20% of the request and locking up the rest.
So I seriously doubt hedge fund requests will crash the market.
Note: I am worried that the Dow could hit the one or both of the next support zones, which I gauge around 6,000 and then 4,000, but I have no idea what might cause it (and I'm sticking by the logic in an old economist joke - "If you give 'em a number, don't give 'em a date; if you give 'em a date, don't give 'em a number."),
I hope he's wrong, and that we've seen the effects of cascading hedge redemptions. Good luck to us all.
The author got it backwards.
"The scheme began to unravel when, in 2008, clients wanted to withdraw $7 billion from the firm and Madoff was struggling to raise $7 billion to cover redemptions. On December 10, 2008, he suggested to his sons that the firm pay out several million dollars in bonuses two months ahead of schedule. Then at his apartment, he admitted to his sons that his firm was a fraud."
Even with GDPs contracting at 0,5-1,5% for some time (and that won't last long), I think there are many real inexpensive shares out there. Look at dividends, p/e, and p/b, allow yourself a huge margin of error, and make a bet.
Once the financial industry decides it has got all the cash from the government it can get, lending will start again, traders (and hedge funds) will decide that the recession will indeed end, future earnings will start to look better and debt smaller due to inflation, and yr. to yr. comparisons will bouy up shortsighted investors due to our society's soundbite attention span.
I guess my gut reaction is to do the opposite. If everyone tells me the sky is falling, I am getting even more Bullish.
I am the most aggressive I have been since June 2006. Loaded up and ready to go here, been buying aggressively last two weeks.. Fully invested now, long by about 75% my max.
Just my thoughts
There was massive leveraging, as derryl pointed out, but not all of that needs to disappear - in fact, what Bernanke is praying for is an eventual re-leveraging at sustainable levels. From what I've been reading, seems the problem now is that banks have capital (from the Fed and Treasury), it's just that they are still too scared to lend it. Their reasoning is probably justified, though, as the second wave of asset destruction has yet to start. The first was induced by Wall Street and began mid-last year when signs in hedge funds first started to show, and was a case of leveraged euphoria coming down to earth. The second is that "earth" in Main Street is also rapidly collapsing, in wages, employment, earnings, and consumption, which is happening right now.
I am playing this as conservatively as possible in cheap equities, and looking for the eventual inflation spike that Bernanke will cause by making this fall as painless as possible. I think that spike will make asset prices very cheap, if not even cheaper than now, for a very long time, when adjusted for inflation. In that sense, I don't see the Dow or S&P falling much further in nominal terms, but I do see real value stagnating at these levels for quite some time. I came to this conclusion when I considered shorting oil stocks, and then noticed that I can be right, and still lose out due to inflation, currency debasement, or whatever. Remember, during the Great Depression, we were on the gold standard. With fiat, we can inflate to eternity to prop up nominal prices. Values do not need to nominally go down for us to all become much poorer in reality.
That's my answer to setting price targets for, well, just about anything except Treasuries.
On Dec 22 10:52 PM Teutonic Knight wrote:
> Everyone of you made interesting points. I am just a technical (meaning
> engineering, not stock chartist!) guy with no economics background
> but I would venture to ask a stupid question, hopefully some one
> would give me a hint of sorts.
>
> derrly made some interesting number crunching above. From my superficial
> and eclectic view, looking a the DJIA average chart over the past
> 30 years, it appears to me that the Dow at 2000 is the support level.
> Is this view credible? If so when will that happen? How, if ever,
> is the drop to 2000 related with derryl numbers. Calling all scholars.
On Dec 22 09:54 AM applesauce wrote:
> Looks like the mattress is the best place for cash in the first quarter.
> Many "experts" are calling for a rising dollor against other currencies
>
> and short term treasuries pay zippo but are selling out. This will
> provide cover for Obama and company to spend over another trillion
> to stimulate"
> the economy throwing cash to friends and family in the first 90 days
> in office, then the hangover starts and inflation will come back
> with a heartless and rapid vengence.
Far more troubling, is that the market has disintegrated in such a rapid and devastating speed, that the average Joe, who was blindly investing his 401(k) and IRA contributions in listed stocks and mutual funds, may become paralyzed and leave his funds in MMM on the sidelines, or worse, refuse to participate in this sham altogether.
When you combine the effects of early Baby Boomers retrieving funds, and new money sidelined, as well as, well heeled erstwhile hedgies retreating, Arab sovereign funds drying up under the weight of decreased oil revenues, Asian markets leeriness of our regulatory enforcement, you've got a serious problem maintaining valuations in the DJI.
I wish I could see a bright and healthy New Year coming our way, but with our manufacturing sector DOA, our banking system barely limping, our national moral fibre mortally wounded, I fear the worst is yet to be.
Happy New Year!
When I recall some top lady stock market strategist (Elaine G) a few years ago predicting that the Dow will go to 40,000 in the coming years, I couldn't help but read all crystal balling with some reservation.
Except perhaps for Nostrademus who even scholars debate his authenticity, no one human could predict the future.
Disclosure: I am both in cash and gold, 50/50. No stocks...yet
On Dec 22 11:46 AM derryl wrote:
> Boubou makes a good point,
>
> "I'm not very conversant with this subject, but it seems to me fatpitch
> has a good point. While redemptions forced large scale sales of assets
> and helped force prices very low, not so much cash has been recovered
> by the punters. The other 90% or so has gone into space.
> So the 'cash on the sidelines' is not such a huge consideration."
>
>
> With 30:1 leveraging in the investment banking (IB) business there
> are 30 phantom IB dollars in the system for every real dollar. The
> IB dollars that inflated asset values in hedge funds are debts that
> have to be repaid when those assets (collateral) are redeemed for
> real dollars. For every 30 IB dollars there is only 1 real dollar
> left after the IB debts are repaid. The whole system was little
> more than a gigantic trade of IOUs. IOUs were used as collateral
> on other IOUs.
>
> If there is $30 trillion numerical asset value in IB inflated funds,
> then when these are completely unwound or deleveraged there will
> only be the original trillion left that the IBs started with. And
> if IBs got their capital as loans from commercial banks, then even
> this $1 trillion of capital will evaporate when those loans are repaid.
>
>
> The whole derivatives system is built on inflated IB money that cannot
> be redeemed for real money because the IB money is mostly IOUs which
> is debt. To make redemptions in real money, funds have to sell assets
> that are not debt, like stocks or mortgages or other real value collateral-based
> loans. But if there was only $1 trillion of real money put into
> this system, then that's all you can collectively take out once all
> the IOUs are written off against each other.
>
> There was a 30:1 bubble and everyone in it felt rich and a lot of
> people cashed out bubble money for real money. Maybe all the real
> money is already gone and there is net zero real value left in this
> system. That would mean a lot of people are swimming naked and the
> tide continues to go out.
Question: what about redemptions from private equity firms? Won't this have a negative effect on equity markets?