Sellout?

08Nov08

I think this article at naked capitalism touches on an interesting point: could forced selloffs by hedge funds really explain recent dips in the market?

I do not believe we have seen the full effect of hedge fund redemptions yet.  We don’t know everything about every fund’s redemption terms, but Dec 31 is a fairly common redemption date regardless of the fund’s liquidity.  Most redemption notices were probably due 9/30 or will be due 11/15.  So, at this point we can only guess as to the extent of redemptions that have been requested.  Also important to keep in mind: most funds promise return of investor capital within a certain number of days after the redemption date, not on the redemption date itself.  In all likelihood, much of the money requested for 12/31 won’t have to be paid out until 45 to 90 days after that date.

What I’m saying is, it’s possible that we haven’t begun to see the full extent of forced selling.  If forced selling by hedge funds is really going to have a significant impact on the market, we’ll see it most in early 2009 as managers scramble to come up with cash at the last minute.  Right now, it’s still plausible to suggest that managers are simply trying to accumulate cash in anticipation of redemptions and do not yet have their backs up against the wall.

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