Hedge Fund Deleveraging Could Be Half Over

by: David Enke November 25, 2008    

David Enke

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A Financial Times blog post at Alphaville reports how 63 percent of respondents believe that the hedge fund deleveraging process is about half over (see Bloomberg article as well). To date, leverage has fallen to 142 percent of AUM, down from 175 percent in 2006 and 2007. A majority of respondents also believe that redemption requests are at least half over, with the process finishing up early next year, probably in the first quarter.

Of interest is how cash now represents approximately 31 percent of total assets, compared to just 7 percent over the last few years. As we have discussed before (see previous post), there is an expectation that once the market turns, and redemption request slow down or stall, the amount of capital that could be deployed back into the market could spark a significant rally. Empirical estimates have between $650 and $700 billion withdrawn from hedge funds, and another $325 to $350 billion from mutual funds (see DowJones Financial News Online article). This amount of funds represents about 6.5-7 percent of the capitalization of the US equity market. Even just a small portion of such capital hitting the market could produce a relief rally that would be jaw-dropping.

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This article has 4 comments:

  •  
    Nov 25 12:37 PM
    A jaw dropping rally would be nice about now...
    Reply | Link to Comment
  •  
    Nov 25 03:30 PM
    The amount of cash on the sideline is meaningless. It does not matter if it is $1 billion or $200 billion. If that money goes into the market (buy) an equal amount comes out (sell). There will be the same amount of cash on the sidlines (more or less) after the "buying". Only the owners of the cash have changed.
    Only the willingness of investors to bid up stocks move its price up.

    This is one of the biggest myths out there that I hear all the time.
    Reply | Link to Comment
  •  
    Nov 27 03:00 AM
    Tom,

    I understand your point, but I'm not certain that I agree. To frame it in a slightly different way, rather than talking in terms of "dollars", how about in terms of "buyers vs. sellers"? Recently, the hedgies/fundies have been sellers, because of the need to meet redemptions, but once that threat diminishes, the pendelum will shift the other way. All those people who were selling, will, at some point, become "buyers" (gotta earn the "20" of the "2 and 20" they charge...;-) )

    Make any sense to you?
    Reply | Link to Comment
  •  
    Nov 28 07:34 PM
    I would be willing to bet the process is nearly 100% over. Why? Do you honestly think these hedgies would say 'we're halfway through'? Hell no. Nobody knew they were even selling until September or so, then it became big news in late October. More than likely they're nearly complete but just claiming 'half over' BECAUSE THEY ARE NOW BUYERS.

    Reply | Link to Comment
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