The Upcoming Hedge Fund Redemption Scramble

Huw van Steenis of Morgan Stanley out with a very sobering report on the hedge and fund of fund industries earlier, with the simple conclusion that hedge funds asset under management may fall from $1.2 trillion to $500 billion (in their bear case scenario; $950 billion in the base case). Aside from poor ongoing performance, the culprit will be escalating redemptions from both private clients, and the marginal (if any) role of fund of funds (90% of all Och Ziff redemptions came from FoF) and endowments (not to mention state pension funds) will play in the future. And while deleveraging may no longer be a critical force as we wrote before, further forced selling is likely to exacerbate the vicious circle of declining asset prices and redemptions.

Some charts:

• Expectations of 30-69% redemptions in 2009 in base/bear case

• Significant redemptions in H2 2008 post Lehman

• Fund of Fund redemption in Europe are far ahead of the U.S.

• US will, however, quickly catch up to Europe post March 31 and gate removal

• Fund Of Fund AUM dropped 40% in 2008; FoFs accounted for 90% of OZM redemptions

• Significant asset reallocations are likely to persist

• Good performance in 2009 after bad 2008; inflows will focus on highly liquid funds with equity long/short, macro themes

• Investable strategies and 2009 focus "buzzwords" (RIP SpecSit )

• Modern asset managers still cheaper compared to traditional ones

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