Hedge fund withdrawals

I apologise if this is in the wrong sub-forum. I had been wondering whether, due to the leverage used by and vast amount of volume they account for, someone could make money just by looking to see when hedge fund withdrawals cluster?

Presumably when there is a requirement for cash, that will mean the funds liquidating positions or borrowing money in order pay the withdrawals? Either way wouldn't the market either fall (or rise if they are largely short, either way there should be increased movement) or short term interest rates rise?

Just something I thought about anyway.

If this post betrays my poor understanding of the market please do let me know

But how do you know what sorts of positions the hedge funds in question are running? How are you going to know whether they're largely short or long? Moreover, the effect is never going to be that large, since, in the grand scheme of things, HFs are puny.

are yo talking about OI and COT data?

Martinghoul said:

But how do you know what sorts of positions the hedge funds in question are running? How are you going to know whether they're largely short or long? Moreover, the effect is never going to be that large, since, in the grand scheme of things, HFs are puny.

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I don't know exactly, but they have to file those disclosure things don't they? If they have over $100mn in AUM? I'm not saying it would necessarily be a workable strategy for an independent trader, but for a fund, with employees and analysts, wouldn't it be worth looking at when withdrawals cluster?

I meant it as a sort of thought experiment on arbitrage opportunities (either they borrow, raising interest rates in the process, or pull out of the market, causing price swings).

I have no idea how big the market is, does anybody? Given that the notional values of various complex instruments is so unclear (I've heard estimates from $500tn to $1.5 quadrillion), but whciever complex instruments they may use someone still has to hold equities and other conventional securities. If they have to sell them in order to raise capital (since a lot of these complex, tailor made deriatives are presumably very illiquid?) then there will be some impact on the market.

As for the size of hedge funds, the figures I've seen (mostly in newspapers so they are not exactly up to date) range from $1tn to $2tn in assets under management, but with leverage that could rise quite a bit higher. Plus they are responsible for a lot of the automated, black box trading, which accounts for 50-70% of the trades made on some exchanges.

DashRiprock said:

are yo talking about OI and COT data?

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I am unfamiliar with those terms and a quick google search did not enlighten me. What do they mean?

Well if you don;t know what they mean then its obvious you're not talking about them.

LULZ

rite OI is Open Interest is the number of outstanding contracts held overnight.

COT is Commitment of Traders is what the CFTC make on US futures every tuesday about who is holding what kind of positions.

about hedge fund withdrawals... well I dunno rite but if say all hedge funds are mkt neutral or 0 correlation, maybe u still want to no what type of funds are being withraweled from rite? and where money is going?

cos could be like money out of all HF's in approx the same amounts because basic interest rates are rising? like their performance relative to risk free (whatever!) rates drops, so people allocate less of money to them?

but as well it sould be, like, well, say no companies in wilson/watson/wiltshire/whatever index are good for takeovers or mergers, so like a convertible arbitrage fund or event driven fund has nothing 2 trade - so they get redemptions and same money goes in like 130/30 or whatever.

anyway end of ramble

DashRiprock said:

LULZ

rite OI is Open Interest is the number of outstanding contracts held overnight.

COT is Commitment of Traders is what the CFTC make on US futures every tuesday about who is holding what kind of positions.

about hedge fund withdrawals... well I dunno rite but if say all hedge funds are mkt neutral or 0 correlation, maybe u still want to no what type of funds are being withraweled from rite? and where money is going?

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Yes....I suppose:confused

It was just an idea, of course there is no guarantee that any given amount of money will be withdrawn, as you say, if the fund has stellar performance then it is possible nobody will want their money out.

DashRiprock said:

cos could be like money out of all HF's in approx the same amounts because basic interest rates are rising? like their performance relative to risk free (whatever!) rates drops, so people allocate less of money to them?

but as well it sould be, like, well, say no companies in wilson/watson/wiltshire/whatever index are good for takeovers or mergers, so like a convertible arbitrage fund or event driven fund has nothing 2 trade - so they get redemptions and same money goes in like 130/30 or whatever.

anyway end of ramble

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I'm not invested in any hedge funds (I presently lack the £500,000 they want). However, as I understood it, they don't generally just return money to investors unless the fund is winding up, wouldn't they just put it into something secure until their clients had found a better place for it and wanted it back?

Redemption requests sometimes come thick and fast, that is what did for Bernie Madoff. He simply didn't anticipate the amount his clients would want back, so if he had been running a real hedge fund, not a ponzi scheme, then in those circumstances he would have had to turn his investments into cash.

Anyway, I'm a noob so forgive my poor understanding.

You won't be able to detect this unless it's a massive coordinated flight to liquidity, like in 2008. During that time you could actually see the effects of large trades being unwound on an intra-day basis.

Martinghoul said:

You won't be able to detect this unless it's a massive coordinated flight to liquidity, like in 2008. During that time you could actually see the effects of large trades being unwound on an intra-day basis.

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Am I correct in thinking this is why deflation is considered so bad? When people divest and want their cash more than they want to be invested it leads to the economy grinding to a halt.

Do interest rates fall or rise during such an event? I could see them falling since demand for depositing cash would outstrip the need for it (i.e. everyone unwinds their positions and returns the money to their clients who in turn put it into the bank) but I could also see how they could rise; since businesses would need loans to run their operations and wouldn't be able to so easily borrow off the back of shares (due to their plunging price).

jthetrader said:

Am I correct in thinking this is why deflation is considered so bad? When people divest and want their cash more than they want to be invested it leads to the economy grinding to a halt.

Do interest rates fall or rise during such an event? I could see them falling since demand for depositing cash would outstrip the need for it (i.e. everyone unwinds their positions and returns the money to their clients who in turn put it into the bank) but I could also see how they could rise; since businesses would need loans to run their operations and wouldn't be able to so easily borrow off the back of shares (due to their plunging price).

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One of the reasons why taking money out of the mkt and stuffing it under a mattress is bad is illustrated by a concept called the "Paradox of Thrift".

Interest rates should fall because nobody would want to borrow in an environment which you describe.

Martinghoul said:

One of the reasons why taking money out of the mkt and stuffing it under a mattress is bad is illustrated by a concept called the "Paradox of Thrift".

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Cheers, I'll read up on it.

Martinghoul said:

Interest rates should fall because nobody would want to borrow in an environment which you describe.

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Wouldn't some businesses want to borrow though? Nobody really knows how long a recession or mere downturn will last, so it may be worth taking on enough debt to just keep operations ticking over (pay employees, pay insurance etc) during periods when nobody is buying anything from you in the hope that things will pick up again and you will be able to repay the debt.

What do they have to lose by borrowing under such circumstances? If they don't borrow they will definitely go out of business, if they do borrow then they may be able to keep afloat just until trade returns.

jthetrader said:

Wouldn't some businesses want to borrow though? Nobody really knows how long a recession or mere downturn will last, so it may be worth taking on enough debt to just keep operations ticking over (pay employees, pay insurance etc) during periods when nobody is buying anything from you in the hope that things will pick up again and you will be able to repay the debt.

What do they have to lose by borrowing under such circumstances? If they don't borrow they will definitely go out of business, if they do borrow then they may be able to keep afloat just until trade returns.

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Hmmmm, not sure... Why do you assume that to keep going firms need to borrow? Maybe you raise equity capital, which allows you more flexibility? Or your cashflows are sufficient to cover expenses?

At any rate, it's good to be a borrower during times of high inflation. It's good to be a lender during deflation. So in deflation (or during times when deflation is expected) nobody wants to borrow.

Martinghoul said:

At any rate, it's good to be a borrower during times of high inflation. It's good to be a lender during deflation. So in deflation (or during times when deflation is expected) nobody wants to borrow.

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So what do you think is going on right now? Assuming we have inflation way above what is officially reported. Also unwilling and risk averse lenders coupled with a lack of borrowers / confidence.

Perhaps more importantly, how do you see the outcome?

Martinghoul said:

Hmmmm, not sure... Why do you assume that to keep going firms need to borrow? Maybe you raise equity capital, which allows you more flexibility? Or your cashflows are sufficient to cover expenses?

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Some businesses would have sufficient cash flow to cover their expenses, and some may be able to raise money through selling equity. However it is likely that you would either have both or neither, people would probably want to invest in a business which had good cash flow rather than one which was on its knees. Lenders seem to be far less discerning about who they throw their money at than investors.

So, if you were in a business which was not generating sufficient cash flow to be attractive to investors then you would need to borrow money; the banks have lots of cash thanks to everyone divesting (hence you being unable to find investors) and are eager to put their money to work.

Martinghoul said:

At any rate, it's good to be a borrower during times of high inflation. It's good to be a lender during deflation. So in deflation (or during times when deflation is expected) nobody wants to borrow.

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Exactly, which is why masses of debt inevitably mean inflation.

counter_violent said:

So what do you think is going on right now? Assuming we have inflation way above what is officially reported. Also unwilling and risk averse lenders coupled with a lack of borrowers / confidence.

Perhaps more importantly, how do you see the outcome?

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Yep, so there's always a supply-side and demand-side argument to be made. We're in a time of deleveraging, which means that, while it's good to be in debt, we're too late to that party, as we just can't take on any more.

To me, the outcome is relatively clear. Deleveraging is a force of nature and central bank shenanigans are fingers in the dyke. Ultimately, I believe we in the West are in for a decade or more of hangover.

jthetrader said:

Some businesses would have sufficient cash flow to cover their expenses, and some may be able to raise money through selling equity. However it is likely that you would either have both or neither, people would probably want to invest in a business which had good cash flow rather than one which was on its knees. Lenders seem to be far less discerning about who they throw their money at than investors.

So, if you were in a business which was not generating sufficient cash flow to be attractive to investors then you would need to borrow money; the banks have lots of cash thanks to everyone divesting (hence you being unable to find investors) and are eager to put their money to work.

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Sure, but, as a business, I don't want to borrow. This is what it's like in Japan. There's no desire to borrow to fund a given project, because the expected cashflows from the project are not likely to cover interest costs.

Exactly, which is why masses of debt inevitably mean inflation.

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Well, depends on how you look at it. Masses of debt may mean either inflation or deflation. We have historical examples of both.

Martinghoul said:

Sure, but, as a business, I don't want to borrow. This is what it's like in Japan. There's no desire to borrow to fund a given project, because the expected cashflows from the project are not likely to cover interest costs.

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Which I suppose is one advantage of cheap credit. If nobody is borrowing then surely banks would just drop interest rates (on both sides, i.e. payable on deposits and payable on loans) in order to entice borrowers or, perhaps better, people with deposits would get sick of the crappy interest rates they were receiving and would deploy their money in the equity market. I suppose it comes down to whether you believe ordinary people should be investing rather than just saving, clearly everyone on this forum does.

Martinghoul said:

Well, depends on how you look at it. Masses of debt may mean either inflation or deflation. We have historical examples of both.

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Why would it equal deflation, because lenders desperately want their money back and so its value rises?