Yes, Your Money Will Still Be Liquid in the Morning
John Gapper:
John Gapper - Hedge funds are going down with dignity: The hedge fund industry, which enjoyed rapid growth in the first years of the century, is imploding. It took time for the financial crisis that started in banks and investment banks to work its way through to hedge funds. But they are now suffering on an epic scale. Hedge funds that have invested heavily in illiquid assets have lost money rapidly in the past two months. That has encouraged rich investors, who are scared of the chaos in markets and want to hoard cash, to pull out their money at a record rate. The panic is affecting not only small funds but some of the largest institutions in the industry – those that not long ago looked like rivalling troubled investment banks.
Citadel, the Chicago hedge fund run by Ken Griffin, lost 13 per cent of its value in November and is 47 per cent down for the year. D.E. Shaw & Co and Farallon Capital Management, which manages $30bn, have both limited redemptions to investors in an effort to stop cash pouring out and having to liquidate assets. Morgan Stanley estimates that hedge funds’ assets could fall by up to 45 per cent between last June and this January. According to some estimates, the industry will lose about $1,000bn (€791bn, £686bn) in assets from its peak of $2,200bn at the start of 2007. Some of this will have been withdrawn by investors but a lot will have been lost....
[T]he era of hundreds of bankers and investment managers flooding out of big banks and setting up as hedge fund managers – funded and supported by the banks they had just left – is over. Investment banks are cutting back on prime broking, the business of financing hedge funds, and investors are not going to fall for it (for a few years at least). It is not just a matter of many of these funds having lost their investors money. More traumatic is the way in which hedge funds have erected “gates” to stop their investors taking out their cash. These investors are being forced to watch as their assets dwindle away and will remember that experience for some time...
How much will the fact that you cannot withdraw your money at will reduce willingness to invest in hedge funds in the future?
