Despite all the gloom and doom news about European debt and the U.S. economy, not to mention the stomach churning volatility in U.S. stocks, investors are not fleeing hedge funds.
How can we tell? GlobeOp Financial Services, an independent hedge fund administrator, is providing a view into the secretive world of hedge fund redemptions. The GlobeOp Forward Redemption Indicator for August measured 2.71 percent, up from 2.08 percent in July.
According to the company’s CEO Hans Hufschmid, “The Forward Redemption Indicator is encouragingly low given recent market volatility. In fact, it is the lowest August number since readings began in 2008,” continued Hufschmid referring to financial crisis. At this time, we see no sign of investors moving out of hedge funds,” stated Hufschmid in the company’s release.
The Indicator represents the sum of forward redemption notices received from investors in hedge funds administered by GlobeOp, divided by the AuA (assets under administration_ at the beginning of the month for GlobeOp fund administration clients.
Forward redemptions as a percentage of GlobeOp assets under administration have trended significantly lower since reaching a high of 19.27% in November 2008. The 12-month high of 4.59 percent occurred in December 2010, while the all-time low of 2.08 percent GlobeOp publishes the indicator on the 15th business day of each month, suggesting that this gives a “timely and accurate view of the redemption pipeline for investors in hedge funds on the GlobeOp administration pipeline.”
GlobeOp is providing a glimpse into the redemption patterns of investors on its platform, which represents approximately 8-10 percent of the hedge fund industry, with $170 billion in assets under administration.
“Movements in the indicator reflect investor confidence in their allocations to hedge funds,” contends GlobeOp. Unlike subscriptions, redemption notifications are typically received 30-90 days in advance of the redemption date, GlobeOp points out. In addition, investors may cancel redemptions notices, which to me, means there is some uncertainty in the data. And also, hedge funds may vary on how they enforce redemptions. Aren’t hedge funds famous for lock up periods when investors can’t get out? So, in other words, investors can send in their requests for redemptions but they might not be accepted. This is certainly a way to keep money in the market.
So while mutual fund investors have withdrawn hundreds of billions of dollars from the equity market, hedge fund investors are more confident in their allocations to hedge funds.
That, however, doesn’t mean that hedge funds aren’t caught up in the market frenzy. According to today’s Reuters news story, “The Madness of Wall Street”:
Experts say investors should expect even more volatility in stocks, as herd trading by hedge funds, knee-jerk trader reaction to news and lightning fast computer programs combine to make for a new and uncomfortable normal on Wall Street..
If investor redemptions are at a low point from the November 2008 all time high, that is positive news for the market. But even if they are not selling to meet redemptions, hedge funds are still feeding on the surge in volatility.Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio