Published December 1, 2008

Further hedge-fund withdrawals likely: Morgan Stanley

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(NEW YORK) Morgan Stanley increased its estimate for hedge-fund withdrawals as investors raise cash following declines in financial markets worldwide this year.
Mr van Steenis: Asian hedge funds expected to lose 25 to 30 per cent from redemptions

The industry may shrink as much as 45 per cent by the end of the year to US$1.1 trillion from its June peak of US$1.9 trillion, the New York-based bank said in a report on Friday. In October, the bank estimated hedge-fund assets would decline 32 per cent to US$1.3 trillion.

'Poor performance could lead to material further shrinkage in 2009,' Huw van Steenis, a Morgan Stanley analyst in London, wrote.

The hedge-fund industry is experiencing its worst year in almost two decades because of stock-market declines and a credit freeze that started with rising defaults on US sub-prime mortgages. Hedge funds including Satellite Asset Management LP in New York and Millennium Global Investments Ltd in London have suspended investor withdrawals in the past month after being inundated with requests from clients.

Hedge funds have posted investment losses averaging 22 per cent this year through Nov 24, according to Hedge Fund Research Inc's HFRX Global Hedge Fund Index.

European hedge-fund managers may lose as much as 30 per cent of their assets by the end of the year, a revision of October's estimate of 25 per cent, according to Mr van Steenis.

European hedge funds will be affected the most by withdrawals because their investors can ask to have money returned on shorter notice than in the US, he said.

US hedge funds may shed as much as 20 per cent of their values, Mr van Steenis said, up from his earlier estimate of a 15 per cent decline. 'US institutional redemptions could also pick up in the first quarter of 2009,' he said.

Asian hedge funds will lose 25 per cent to 30 per cent from redemptions, his report said.

An increasing number of investor redemptions are coming from institutional investors such as pension funds and university endowments that have 'over-committed to private equity and need to raise cash', Mr van Steenis said.

Hedge funds are private, largely unregulated pools of money whose managers can buy or sell any assets and participate substantially in profits from investments. -- Bloomberg