WSJ: Hedge Funds Get Rattles as Investors Seek Exits

Funny - the more things change, the more they stay the same. We had the exact same issue August 2007... on the plus side, the more redemptions some of these lousy hedge funds have, the less damage they can do in the long run. It is just funny how things come full circle.

But as I said late this week - this could cause yet another major issue as hedge funds throw in the towel and liquidate (and/or their investors demand their money back which would effectively create a very similar effect.

• With anxiety about hedge-fund woes gripping the market, funds have their own fear: their investors. Some investors, particularly what are known as "funds of funds," are demanding their money back and may ramp up requests in the weeks ahead. That has prompted hedge-fund managers to sell securities to raise cash.

• "As the hedge fund investor base broadens, hedge fund portfolio management...slips out of the hands of the portfolio managers and into the hands of the investors," wrote Andrew Redleaf, who runs Whitebox Advisors, a Minneapolis hedge fund with about $5 billion under management, in an August client letter. "It is no insult to the investors to say that this worsens performance."

• Funds-of-funds select hedge funds on behalf of pension funds, wealthy individuals or other investors, and charge a layer of fees on top of the hefty fees levied by hedge funds themselves. They often ask hedge funds for the option to redeem money as often as monthly and get good terms because they can bring in big chunks of cash at once.

• Investors know that it can pay to be the first out the door of an underperforming hedge fund because as other investors cash out, the fund sells its holdings, pushing down prices. Many investors themselves have borrowed funds to juice their returns and when leverage amplifies their losses they can end up more eager to pull out.

• "A lot of institutions and veteran investors in hedge funds aren't making massive redemptions, but newer investors into funds are more concerned because of some of the losses this year," says Robert Discolo, head of hedge-fund strategies at AIG Investments, which invests about $10 billion in hedge funds. "And it looks like high-net-worth clients are a little more impatient and are pulling out."

• "The deficiencies of certain hedge-fund managers are being revealed," he says.