Trimming the hedges

While we might get a little relief bounce near term, this is just the start of the dreaded, Halloween capped month of October. Of all the ghouls to come out on that most American of all American holidays (July 4th maybe excepted), the ones most likely to spread fear and mayhem are the ones dressed up like hedges. FT Alhpaville explains the plot:

Hedge funds, reports the FT today, are facing their worst year on record

Yesterday was the final day (end of quarter) for investors in most hedge funds to file requests to redeem cash by December. Given the huge variance in perfomance, those redemptions are expected to be rather significant. Estimates vary, but most are in the hundreds of billions.

As investors redeem, hedge funds without the cash on hand will of course be forced into asset sales.

A significant proportion of “cash” holdings - around 17 per cent according to Citi - are in money market funds. Which really, really don’t want to be facing redemptions right now either.

The bottom line, according to industry outfit hedge fund research, is that up to 2000 hedge funds can be expected to be liquidated in the coming months. Given the complexity of the market - the way hedge funds and their holdings so interlace the financial system, this is a potential massive shock. It almost makes the failure of Lehman pale into insignificance. The Lehman collapse will be worked out over years. Hedge fund redemptions and liquidations will take days or weeks.

And how do you spot the hedge ghoul on Halloween?

It'll be dressed up like Ichabod Crane:

Ichabod Crane is a school teacher who travels to Sleepy Hollow to teach the children of the area. This, in company with his ability to ingratiate himself, persuades many of the townspeople to make an overnight guest of him, which serves as his sole means of lodging. He follows strict morals in the schoolroom, including the proverbial "Spare the rod and spoil the child"; outside the schoolroom, he is shown to have few morals and no motive but his own gratification. Despite being thin, he is capable of eating astonishingly large amounts of food and is constantly seeking to do so. In addition to this, he is excessively superstitious, often to the extent of believing every myth, legend, tall tale, etc. to be literally true. As a result, he is perpetually frightened by anything that reminds him of ghosts or demons.

a tertiary character suggests that he had been frightened, both of the Horseman and of his (Ichabod's) landlord, into leaving the town forever, later to become a lawyer in Philadelphia.

FOLLOW UP:

Andrew Cavell at Financial Crookery says Light at End of Tunnel is Hedge Fund Redemption Train.