It's true, hedge fund redemptions are still going on. A total of $73bn was redeemed from hedge fund managers in Jan 2009. Given the need to meet client redemptions, highly liquid asset classes such as index futures seem to be the obvious choice for hedge fund managers.
But having witnessed the sharp falls in world equity indices in the last 2 weeks, we wonder what the impact would be on hedge fund performance. HFRX reported dismal Feb-09 results for equity strategies.
I believe this can be partially attributed to the high cost of hedging. Put option interest has been declining since Nov 08 due to higher costs - it costs approximately 25% to purchase a 12 month at-the-money put on SX5E. So implicitly it costs the same amount to buy a put as the estimated downside of the position, and if historically bear market rallies provide a 50% upside, the cost of hedging would have consumed 1/2 of the potential profits.
It would be interesting to find out the average level of protection put on by equity-based hedge funds...
Eric Tan, London
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