*TOKYO (Nikkei)--Speculation is aswirl that global stock markets may come under renewed downward pressure from hedge funds forced to cash out of their equity holdings in February to meet a flurry of investor requests for redemptions.
Unlike ordinary investment trusts, most hedge funds have rules that allow them to place limits on withdrawals by investors, such as once a quarter or every six months. They have attracted money by underscoring that while the rules may force investors to sacrifice liquidity, the guildelines also serve to help the funds concentrate on fund management over longer periods to yield higher returns. Moreover, additional provisions enable hedge funds to freeze redemptions in emergency situations. In fact, many hedge funds did just that to deal with a wave of redemption requests filed late last year. At the end of December last year, the quarterly deadline for redemptions, they managed to refuse to let investors take their money out, using the rules as an excuse. At the end of March 2009, the next deadline, however, funds will face stronger demands from investors for money withdrawals. Even worse, the recent situation surrounding the hedge fund industry has been somewhat complicated. Pension funds and other institutional investors tend to invest through funds of funds, rather than allocate money directly to individual hedge funds. If a fund of funds receives a redemption request from its customer investing in one of the hedge funds comprising its portfolio that moved to freeze redemptions, it has no choice but to raise cash to meet such request by either unloading assets at other hedge fund designed to offer unconditional redemptions or borrowing money from banks. The reality, however, is that there are no banks for now that are willing to lend money to funds of funds. Such development means that the redemption-free hedge fund has to pay the cost, despite the fact that the performance of this type of fund is relatively favorable. To avoid the situation, even those funds enjoying steady performances are also forced to freeze redemptions, creating a negative cycle of payouts suspension sweeping the hedge fund sector involving funds of funds. The U.S. media sometimes carry commentaries critical of hedge funds, with a Bloomberg News saying that these funds take 20% of the profit on their money in the good times, then refuses to let them have it back when the weather turns rough. Some point out that if the current situation is kept intact, the hedge fund industry as a whole could suffer a loss of investor trust. According to Hidenao Miyajima, chief strategist at Barclays Capital Japan Ltd., hedge fund firms have frozen redemptions on a total of approximately 1,800 funds, including about 1,000 funds focusing on stocks of emerging nations and 600 specializing in long and short positions in global stocks. The total number represents roughly 25% of all hedge funds operated in the world. The combined net asset value at the 1,800 funds has attained 40-45 trillion yen. Given the fact that the hedge fund industry's net asset value has recently shrunk to 110-120 trillion yen from 200 trillion yen at the end of June 2008, one-third of hedge funds overall have refused to redeem in terms of NAV. To date, the freezing of redemptions by hedge funds has not been a bad news for the global stock market, partly because a recovery in the market started around Nov. 20 last year on the back of subdued stock selling by hedge funds that suspended redemptions. Even so, the continued freezing of payouts would spark a major backlash against large hedge funds that manage money for pension funds worldwide, with Miyajima saying that "Unless they accept redemption requests from investors, this could provoke international dispute on this matter." Because Feb. 15 is the deadline for investors to ask hedge funds for their money back at the end of March when their books are closed, pension funds and other investors are likely to rush for redemption requests in the next month, reinforcing the possibility that stock sell-off by hedge funds may push the world financial market back into crisis mode. --Translated from an article written by Nikkei senior staff writer Masataka Maeda (The Nikkei Veritas January 11 edition) * * * * * * * ** --~--~---------~--~----~------------~-------~--~----~ You received this message because you are subscribed to the Google Groups ""GLOBAL SPECULATORS"" group. To post to this group, send email to [email protected] To unsubscribe from this group, send email to [email protected] For more options, visit this group at http://groups.google.com/group/globalspeculators?hl=en -~----------~----~----~----~------~----~------~--~---
