More mystical dates
Feb 13th, 2009 | Filed under: Media Coverage of Hedge Funds, Today's Post
Last fall, we questioned the commonly-held assumption that hedge fund redemptions played a major and direct role in the market downturn. As market participants, hedge funds surely played a role. But were they a catalyst? As we pointed out, commentators have recently begun to revere a set of mystical dates (“D-Days”) based on the Hedgistanian redemption calendar. Worshipers of these date contend that 45 days before the end of each quarter, the hedge fund spirits begun to dump their holdings.
Geoffrey Rogow of the WSJ’s Marketbeat blog examines this calendar obsession today as this coming Sunday marks the beginning of the 45 day countdown to the end of Q1. He writes that:
“Some believe it was no accident the market hit its low point on Nov. 20, just more than 40 days before the end of the fourth quarter, when redemption requests would have been at their peak.”
Until we see academic evidence of this, our jury remains out. According to HFR, overall 2008 redemptions were about $175b in the second half of last year – most of it in Q4. That’s about 10% of the hedge fund industry’s January 2008 AUM. While many hedge fund were revealed to be long-bias in Q4, a large proportion of funds still contained significant short positions (particularly market neutral funds and short bias funds). So the effect of redemptions is mitigated by the upward price pressure caused by closing out those short positions.
In addition, while hedge funds are certainly higher velocity traders than traditional hedge funds, their AUM is puny compared to other investors. AIMA’s “Roadmap to hedge funds” published in the fall, compared hedge fund AUM to pensions, insurance companies and other institutional investors: More…
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The whole point of “notice periods” is precisely so that hedge funds have time, 30 or 45 or 90 days, to liquidate positions to meet redemptions. The idea that hedge funds wait until N days before redemption, quickly liquidate what they must, and then return to business as usual is silly. In reality a manager will liquidate gradually over her redemption period—that is the whole point of the notice period. Thus there is no theoretical basis to think that redemption notice deadlines will increase selling propensity on any specific day.
There might however be something in the converse. That is to say, hedge funds might begin to feel more comfortable initiating new positions 30 or 45 days before end of quarter because at that point they know that no further redemptions need to be met for some period of time.
In the hedge fund sector, the 45-day notice period does not seem to be the most common one. For more information, see the Dec 2007 ECB Financial Stability Review (http://www.ecb.int/pub/pdf/other/financialstabilityreview200712en.pdf), Box 4 on Hedge fund investor redemption restrictions and the risk of runs by investors, pp. 56-59.