Hedge funds struggle with redemption requests

ANALYSIS:THE BELEAGUERED hedge fund industry is struggling to deal with the ongoing wave of redemption requests from unnerved customers, with the legendary Paul Tudor Jones the latest high-profile manager to suspend fund withdrawals.

Tudor Jones told clients that investors had requested as much as 14 per cent of their money by the end of the year. That would have left the remaining investors holding an excess of hard-to-sell assets, forcing him to suspend redemptions. He now plans to split his $10 billion (€7.87 billion) BVI Global Fund in two, with the illiquid assets being spun off into a separate fund.

Withdrawals were likely to be prohibited until the end of March 2009, he said.

One of the most successful traders of his generation, Tudor Jones famously predicted and profited from the stock market crash of 1987 as well as securing triple-digit returns in five consecutive years during the 1980s. His fund has made profits in each of the last 22 years and was down just 5 per cent to the end of November, comfortably outperforming the 22 per cent decline suffered by the hedge fund industry as a whole.

Given such circumstances, many now presume less illustrious outfits are being hit by an absolute barrage of redemption requests.

The hedge fund industry, worth more than $1.9 trillion at the end of June, could plunge to less than half that figure by the end of 2009, Morgan Stanley estimated last week. It said European funds were among the hardest hit by redemption requests, with withdrawals in the region of 25 per cent to 30 per cent in the second half of this year.

Empirical Research Partners, a US boutique research firm, was similarly pessimistic, predicting that about $650 billion would be withdrawn from hedge funds by the end of this year.

Billionaire hedge fund manager George Soros last month predicted poor performance and massive redemption requests would force as many as two-thirds of hedge funds to be closed down.

Managers have reacted to the crisis by slashing fees. Traditionally, hedge funds operated a lucrative "two and 20" structure - an annual 2 per cent fee allied to a 20 per cent performance fee.

Those days are gone for all but the most established and successful funds.

Norval Loftus, investment manager at Ansbacher, told a recent conference on alternative investments in London that "a lot of hedge fund managers are going to be working for nothing next year".

Forced selling of stocks and other securities to meet redemption requests has contributed to stock market volatility, which recently surpassed levels last seen in 1929. The deleveraging process still has some way to go, according to US outfit Sanford C Bernstein, which found in a survey last week that funds are approximately halfway done in their efforts to reduce leverage. It estimates that "roughly $200 billion will be additionally unwound".

Hedge fund woes are also a concern to many Irish workers. Ireland is the leading European centre for hedge fund administration.

Between 2003 and 2007, the number of non-Irish registered funds administered in Ireland grew from 1,654 to 2,752, with assets under administration multiplying from $199 billion to more than $1 trillion.

More than 9,000 people in Ireland are employed in the funds administration sector.