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Hedge funds brace for the worst after a terrible October

Bloomberg logo Bloomberg 11/9/2018 Saijel Kishan

After beleaguered hedge fund managers had their worst month in seven years, many are bracing for an industry D-Day: Nov. 15.

That’s the deadline for investors to put managers on notice to get some -- or all -- of their money at year end.

If history is any guide, the rush for the exits will be swift and accelerate. Clients have already pulled $11.1 billion even before funds fell into the red for the year.

The last time the industry careened toward annual losses was in 2015, when managers were tripped up by events including the unexpected surge in the Swiss franc and the devaluation of the Chinese yuan. The fallout: clients withdrew $77.2 billion between the fourth quarter of that year and the first quarter of 2017 -- the biggest withdrawals since the global financial crisis.

a screenshot of a cell phone: Crisis of Confidence © Bloomberg Crisis of Confidence

Investors can cash out of most hedge funds quarterly after giving 45 days notice. Withdrawal schedules can vary, as do notice periods. Firms can also levy penalties on clients who want to bail outside of agreed schedules, while investors can cancel redemption plans if they change their minds.

Redemptions are yet another blow for the $3 trillion industry, which has been blighted by years of mediocre performance and fund closures. Several managers have announced plans to shutter in anticipation of year-end withdrawals.

The industry lost 3 percent in October and is down 1.7 percent this year, according to Hedge Fund Research Inc. U.S. equities had their worst month since 2011.

Despite the current woes, withdrawals during 2008 were much more acute. They amounted to 11 percent of the industry’s assets at the time, according to calculations based on HFR data. By contrast, in 2016 redemptions were just 2.3 percent and so far this year they are less than 1 percent.

That might be no solace to fund managers on Nov. 15.

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