Interesting post over at the AllAboutAlpha site that is worth the read. The post discusses how even if a hedge fund has stop reporting returns, this does not imply that the fund is dead and closing up shop after blowing-up in the recent market downturn. As it turns out, only about a fifth of the funds (according to the study) stop reporting because they are liquidating. Others simply have stopped taking on new investors, or have other reasons for not reporting returns. Of interest in the article is how the researchers studied fund-of-funds to estimate (guess) what the returns are of those funds that have stopped reporting (given that their performance is still showing up in the fund-of-funds that do report). Not surprising, while the "dead" funds that no longer report returns did perform worse than those that did report, the level of losses were close to -3%, and not in the category of "blown-up." While many funds may still go under (in part due to it now taking too long to reach high water marks after significant losses), the reports of the death of hedge funds may be greatly exaggerated.
A Financial Times blog post at Alphaville reports how 63 percent of respondents believe that the hedge fund deleveraging process is about half over (see Bloomberg article as well). To date, leverage has fallen to 142 percent of AUM, down from 175 percent in 2006 and 2007. A majority of respondents also believe that redemption requests are at least half over, with the process finishing up early next year, probably in the first quarter. Of interest is how cash now represents approximately 31 percent of total assets, compared to just 7 percent over the last few years. As we have discussed before (see previous post), there is an expectation that once the market turns, and redemption request slow down or stall, the amount of capital that could be deployed back into the market could spark a significant rally. Empirical estimates have between $650 and $700 billion withdrawn from hedge funds, and another $325 to $350 billion from mutual funds (see DowJones Financial News Online article). This amount of funds represents about 6.5-7 percent of the capitalization of the US equity market. Even just a small portion of such capital hitting the market could produce a relief rally that would be jaw-dropping.
A recent Financial Times article highlights that 15 percent of asset management houses, pension funds, and private banks have invested in hedge fund replication strategies (the survey had only 97 respondents). Given the low number of companies offering products, the interest and use indicates that some firms are engaged in internal model development. As further encouragement for the field, 55 percent say they would be willing to consider investing in replication strategies, while only 30 percent were against such investment (of course, that could change as the strategies become more developed). On the down side, a significant minority of respondents also felt that hedge fund returns could not be replicated, were not transparent enough, used unproved technology, or simply gave poor returns. Many appear to be waiting for better products, even though there is a significant fee reduction when using replication strategies. Considering that the hedge fund industry is currently unpopular and an easy punching bag, not to mention being down for the year, the results are encouraging for those doing replication research and indicate some interest for the development of more robust models going forward.
Shelf registrations are increasing, but it has little to do with tapping into future higher prices or a new found optimism in the market (see WSJ article). Back in 2005, the SEC put a "shelf life" expiration date of three years on all shelf offerings. The initial set of filings after the ruling are now set to expire on December 1st of this year, causing many companies to refile, even if they are not expecting to access the equity capital markets at a time when prices are depressed. Nonetheless, since shelf deals can be accessed at any time, it is smart to re-register so that capital can be accessed in the future when it make does make sense. When the market is rallying, it is not unusual for companies to float equity that may be selling at inflated prices. On the other hand, accessing capital in a down market when value is low is probably more of an indication of trouble, making it less likely that companies will sell stock off the shelf in the next few months, even if re-registering opens up the window for them.
While the Citigroup news is certainly generating much of the financial news this morning (and for good reason), three more banks have also recently failed, bring the total to twenty-two (see WSJ article). Two of the recent bank failures were California thrifts, while the third was located in Georgia. Of the three recent failures, Downey Savings & Loan of Newport Beach was the largest, and the third largest bank failure this year, coming in at $12.87 billion - still less than the $307 billion failure of Washington Mutual.