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Hedge fund investors withdrew US$32b in July

Outflows may increase in August, industry survey finds

(NEW YORK) Investors withdrew a net US$32 billion from hedge funds in July, the most in any month since at least 2000, helping to spark global stock and bond sell-offs, according to a new industry survey.

Funds of hedge funds, which invest clients’ money with other managers, pulled US$55 billion, according to the TrimTabs BarclayHedge Flow Report. That was partially offset by US$23 billion in direct investments into hedge funds. Outflows may increase in August, the report said.

Withdrawals by funds of funds represented almost 5 per cent of their estimated US$1.2 trillion in assets, according to the report, which was prepared by Santa Rosa, California-based TrimTabs Investment Research and Barclay Hedge Ltd of Fairfield, Iowa.

Hedge funds and funds of funds oversee a combined US$1.9 trillion, according to the survey.

‘We believe deleveraging and risk reduction by funds of hedge funds was a major cause of the turbulence in the credit markets and the equity markets in July and August,’ Charles Biderman, chief executive officer of TrimTabs, said on Monday in a statement.

Most hedge funds require clients to give at least 30 days’ notice before they can redeem money, meaning that fund managers started seeing requests for July withdrawals in May and June.

The report was the first by TrimTabs, which tracks fund flows, and Barclay Hedge, which compiles data on more than 5,400 hedge funds and managed futures funds.

Meanwhile, a study found that hedge funds in the US might leave the country if subjected to burdensome regulation.

‘With a heavy regulatory hand, there is a risk of hedge funds moving totally offshore,’ said a Federal Reserve Bank of New York study.

New York Fed vice-president John Kambhu, assistant vice-president Til Schuermann and vice-president Kevin Stiroh wrote the paper released on Tuesday.

‘Outright regulation of hedge funds such as through activity restrictions, required capital or leverage restrictions has not received much attention and could have substantial costs,’ the authors wrote in the report.

Hedge funds are largely unregulated pools of private capital that are linked to the broader economy as their gains and losses affect banks, the paper said. In the event of big declines, a bank’s ‘greater exposure to risk may reduce its ability or willingness to extend credit to worthy borrowers’, the paper said.

Hedge fund assets worldwide increased almost threefold in the past five years to US$1.75 trillion as at June, according to Chicago-based Hedge Fund Research Inc.

As they grow in size relative to the US economy, disclosures that do not impede the business interests of the hedge funds would ‘help’ investors and regulators better understand the risks, the authors wrote.

Otherwise, under ‘more forceful’ oversight, ‘regulators might go from seeing little to seeing nothing’, the paper said.

 

Source: Bloomberg (Business Times 6 Sept 07)

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