A few weeks ago, we reported that even when the market was hitting all time highs ahead of the historic October bloodbath, hedge funds investors were growing increasingly nervous, and rushed to redeem $15 billion from the space, the largest single monthly outflow in years, bringing year-to-date net flows to flat after being stubbornly in the green for much of the year despite what has been another deplorable performance year for hedge funds.
This was not the first time either: over the last three years, investors had removed over $100 billion from the industry, but performance gains had offset these losses… at least until last month.
And then October came which was not only a “bloodbath across almost every strategy“, but was the worst month for the broader hedge fund space in 7 years.
Which is why just one week ago, we warned that what may be the most underappreciated risk to the market is a surge in redemptions requests as limited partners got their monthly performance reports showing the worst month in years, and in kneejerk response faxing in their request to have most or all of their money redeemed now before the rout accelerated.
Today, Bloomberg picks up on this risk, with reporter Saijel Kishan writing that following the second worst month of the decade for the hedge fund industry, many are bracing for an industry D-Day: Nov. 15.
That, as Kishan explains, is the deadline for investors to put managers on notice to get some – or all – of their money at year end.
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.
Only this time few will be changing their minds, and the total redemption total will be a bloodbath, because if history is any guide, “the rush for the exits will be swift and accelerate.”
Having previously noted that September outflows – at a time of record stock prices – jumped the most in years, the October total will be a sight to behold. The industry lost 3% in October and is down 1.7% this year, according to HFR. It largely reflected the worst month for US stocks since 2011.
As Bloomberg notes, the last time the industry careened toward annual losses – as it does now – 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. Back then 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.
Why does this matter? Because with hedge funds expecting a flood of redemption requests on November 15 – with few outperforming there is little reason for even the marquee names to be spared – and with cash levels in the single digits, the question becomes who sells first ahead of everyone else, to satisfy the cash calls.
This is also the warning raised by Nomura’s Charlie McElligott, who reminds us this morning that while systematic, vol-targeting, CTA and other quant funds may have ended their selling (and in the case of Trend CTAs are again “max long”), a key point raised by JPM’s Marko Kolanovic to justify his bullish thesis, the slow money outflows are only now just beginning as the redemptions requests come in:
One point brought-up last night at an excellent client dinner I hosted and put on by the good folks at Instinet: the upcoming “redemption notice” window for Hedge Funds, which in-theory closes next week ~Nov 15th (mid-qtr date) and looks to be an inevitability after the worst month for HF’s in seven years
Perhaps this “getting ahead of redemption risk” phenomenon could explain a large part of yesterday’s “return to de-grossing” behavior in the U.S. Equities space, with the pain-trade telltale sign of “Value” again outperforming “Growth” was evident
How bad will the coming redemption bloodbath be, if not for the “hedge” funds for whom “hedge” means 5x beta and fully deserve everything they get in the coming days, then for everyone else? Keep an eye on stocks today and over the next few days as the great rush to sell before everyone else begins.