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). It has been reported that, to date, leverage has fallen to 142 percent of Assets Under Management, down from a reported 175 percent in 2006 and 2007. Others report that fund redemption requests are at least half over, with the process finishing up early next year, probably in the first quarter.
It is reported that cash now represents approximately 31 percent of total assets, compared to just 7 percent over the last few years. Naturally, some expect that once the market turns, and redemption requests slow down or stall, the amount of capital that could be deployed back into the market might 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 Empirical estimates have between $650 and $700 billion withdrawn from hedge funds, and another $325 to $350 billion from mutual funds (see DowJones Financial News Online article).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 sharp relief rally.
Irony Dept: as recently as 2 weeks ago Barron's quoted Citibank as charging the business media for having made "too much" of the "panicky flight" out of hedge funds. In what was seemingly a truism, Citibank reportedly "insisted" that "market performance" was a much bigger factor in the decline. Huh?
