Hedge Funds May Sell $200 Billion More of Assets, Survey Finds

Hedge Funds May Sell $200 Billion More of Assets, Survey Finds

By Saijel Kishan

Nov. 24 (Bloomberg) -- Hedge funds are about halfway done selling securities to reduce their use of borrowed money and may unload $200 billion more to complete the process, according to managers surveyed by Sanford C. Bernstein & Co.

The survey found that 63 percent of hedge-fund managers said the sale of assets to cut leverage was at least half completed. Twenty-three percent said the process was three- quarters finished, New York-based Bernstein said.

Hedge funds, which borrow money in an effort to increase trading profits, have been forced to unload assets to meet client withdrawals and tighter lending requirements. That has amplified losses in the stock and bond markets. The Standard & Poor’s Index 500 Index fell 38 percent this year through October, while hedge funds lost an average of 16 percent, according to data compiled by Hedge Fund Research Inc.

“We estimate that roughly $200 billion will be additionally unwound,” Adam Parker, an analyst at Bernstein wrote in a Nov. 21 report to clients. The survey was based on interviews in the first two weeks of November with managers of more than 65 hedge funds overseeing a combined $100 billion.

The amount of gross leverage used by hedge funds fell to 142 percent of assets from 175 percent in 2006 and 2007, the report said.

Some respondents said they expect deleveraging to continue as long as the Chicago Board Options Exchange Volatility Index, known as the VIX, remains elevated, Parker said.

The benchmark for U.S. stock options closed at 72.67 on Nov. 21. The day before, the index set a record of 80.86 when the Standard & Poor’s 500 Index of the U.S. largest companies slumped to its lowest level in 11 years. Before trading opened today, the S&P 500 dropped 46 percent this year.

Investor Withdrawals

Investors pulled $40 billion from the $1.5 trillion hedge fund industry last month and market losses cut industry assets by $115 billion, Hedge Fund Research said.

Fifty-two percent of managers surveyed said the process of investor withdrawals is complete and transfers of money to clients to be done by the end of the first quarter, while 41 percent said they think half of redemptions are yet to come.

Clients putting in 30-day notices to withdraw their money for the end of December may be a catalyst for further deleveraging, “a possible explanation for the recent steep selloff,” Parker said.

Hedge funds, private and largely unregulated pools of capital, have raised their cash holdings to an average of 31 percent of assets from 7 percent in the previous two years, according to the survey.

“Our conclusion is that increasing cash on the sidelines and quality, liquid stocks used as sources of funds will likely remain a significant issue in the near term,” Parker said.

Forty-two percent of hedge funds follow equity-market strategies, while 25 percent use an approach that seeks to profit from companies going through events such as mergers and spinoffs, Bernstein said.

About 16 percent of funds invest in emerging markets, 10 percent in fixed-income strategies and 8 percent is in macro, which trades everything from stocks to commodities, the survey said.

 

hedge funds $1.5 trillion under management

mutual funds $12 trillion U.S.
$26 trillion worldwide

yes, hedge can use leverage but none are stupid crazy

"The amount of gross leverage used by hedge funds fell to 142 percent of assets from 175 percent in 2006 and 2007, the report said."

so, with 2 to 1 leverage hedge fund controls $3 trillion, still way smaller than mutual funds
yet they are looked upon as the "bad guy"

 

but hedge can invest in futures and option w. additional 'leverage' in stock markets

many mutual can't

 

more numbers to throw out there

hedge funds have estimated 1/3 in stocks so
1/3 of $1.5 trillion is $500 million
at 2 to 1 leverage (article mentions less than 2 to 1 the past three years)
so hedge funds have/had about $1 trillion in the stock market

Mutual fund estimated to have $6 trillion in stock market at the beginning of 2007 which could have been higher before the sell off

so $1 trillion vs. $6 trillion

and hedge funds are doing better than the market and thus mutual funds
(mutual funds, historically, cant beat the market)

"The Standard & Poor’s Index 500 Index fell 38 percent this year through October, while hedge funds lost an average of 16 percent, according to data compiled by Hedge Fund Research Inc."

 

Plus don't forget that virtually every equity hedge fund (maybe a few big unleveraged activist funds are an exception here) has long and short equity positions, yet only the long positions get reported to the SEC. This confuses the dumbass journalists that write those ridiculous articles.

No fund of any size is leveraged 2:1 long equities.

They'd be 150% long and 100% short, giving them a net long exposure of 50%.

 

edit: my research came up with 1/3 in stocks but the article states 42% in stocks so make it 50% then

instead of $1 trillion, it is approximately

$1.5 trillion vs $6 trillion

i agree, these type of articles always point to the big bad hedge funds and ignore the mutual fund's redemption and selling