Hedge funds brace for the worst

The Norwalk Hour - - BUSINESS -

Af­ter be­lea­guered hedge fund man­agers had their worst month in seven years, many are brac­ing for an in­dus­try day of reck­on­ing: Nov. 15.

That’s the dead­line for in­vestors to put man­agers on no­tice to get some — or all — of their money at year end.

If his­tory is any guide, the rush for the ex­its will be swift and ac­cel­er­ate. Clients have al­ready pulled $11.1 bil­lion even be­fore funds fell into the red for the year.

The last time the in­dus­try ca­reened to­ward an­nual losses was in 2015, when man­agers were tripped up by events in­clud­ing the un­ex­pected surge in the Swiss franc and the de­val­u­a­tion of the Chi­nese yuan. The fall­out: clients with­drew $77.2 bil­lion be­tween the fourth quar­ter of that year and the first quar­ter of 2017 — the big­gest with­drawals since the global fi­nan­cial cri­sis.

Still, it may not be all doom and gloom. What’s dif­fer­ent this year from 2015 is that some in­vestors are pre­par­ing for the end of the years­long bull market and may in­stead add money to funds whose man­agers tout an abil­ity to bet­ter nav­i­gate down­turns.

In­vestors can cash out of most hedge funds quar­terly af­ter giv­ing 45 days no­tice. With­drawal sched­ules can vary, as do no­tice pe­ri­ods. Firms can also levy penal­ties on clients who want to bail out­side of agreed sched­ules, while in­vestors can can­cel redemp­tion plans if they change their minds.

Redemp­tions are yet an­other blow for the $3 tril­lion in­dus­try, which has been blighted by years of medi­ocre per­for­mance and fund clo­sures. Sev­eral man­agers have an­nounced plans to shut­ter in an­tic­i­pa­tion of year-end with­drawals.

The in­dus­try lost 3 per­cent in Oc­to­ber and is down 1.7 per­cent this year as stock pick­ers to macro traders fal­tered, ac­cord­ing to Hedge Fund Re­search Inc. U.S. eq­ui­ties had their worst month since 2011.

De­spite the cur­rent woes, with­drawals dur­ing 2008 were much more acute. They amounted to 11 per­cent of the in­dus­try’s as­sets at the time, ac­cord­ing to cal­cu­la­tions based on HFR data. By con­trast, in 2016 redemp­tions were just 2.3 per­cent and so far this year it’s less than 1 per­cent.

Still, that may be no so­lace to fund man­agers on Nov. 15.

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