15/10/2008

Redemptions take a new twist

Redemptions have taken a new twist as hedge funds and in particular funds of hedge funds (FoHF) are increasingly seen as “the next best thing to cash”.

Despite a 30 September deadline for end of year redemptions, the full scale of the requests won’t be known until the end of November.

Cem Habib, principal at FoHF Altedge is eyeing that date as a safe haven, but iterated that Altedge hadn’t faced any redemption requests.

Duet Group’s co-founder Alain Schibl was also very relieved when the 30 September deadline passed without any redemption request but, as wild rumours of $700bn redemptions do the rounds, was very aware others were not as lucky.

Few FoHFs have survived the latest round of redemptions and even many of the established managers will endure a torrid last few months to the year before realising the extent of losses by January.

However, the twist that has seen even solidly performing hedge funds and FoHFs face redemptions is more worrying. Increasingly some institutional investors have started to regard the sector as a “temporary parking lot” according to one FoHF manager, where institutional investors use FoHFs in difficult market conditions as a cash alternative.

This means that redemptions are not just triggered by poor performance; because of their liquid nature, many FoHFs have become part of a long-term investment plan, enabling instant withdrawal during difficult times for investors.

Equally, strong performing, highly liquid single manager hedge funds like CTAs have been hit, as endowments were targeted with cash calls from private equity funds. Without ready access to cash to meet these calls, endowments have gone straight to underlying managers, according to a London-based FoHF manager who has three underlying managers that have suffered this fate.

It signals the intention that some private equity funds are getting ready to take advantage of distressed purchases (and struggling to get hold of debt from banks) and are therefore tapping promised money from investors.

Overall, institutions have remained pretty loyal, whereas private banks and private wealth management division are seen as the most adverse, keeping 30% in cash. Total industry redemption†

numbers are clouded as cash positions and capital moving between FoHFs and hedge funds distorts the actual numbers. FoHFs, which traditionally hold up to 5% in cash, may have as much as 30% in those positions and are waiting to deploy or return cash to investors.