Hedge fund December cash call won't hit market hard

By Laurence Fletcher and Svea Herbst-Analysis

LONDON/BOSTON (Reuters) - Hedge funds are facing heavy year-end outflows as investors pull out their cash after record poor returns, but this is unlikely to heighten market volatility as many funds have already taken evasive action.

Many investors have been hanging on until the last minute to assess what looks set to be the worst year on record for the once red-hot industry -- up to October funds lost 16.05 percent, according to Hedge Fund Research HFR.L.

However, many funds have already sold more liquid assets and built up cash levels to meet expected investor withdrawals, while some investors may later withdraw redemption requests and others may not ask for their cash back until after year-end portfolio reviews.

Funds with 60 or 90-day notice periods will already know redemption requests, while strategies requiring 45 days' notice face their last redemption requests on Tuesday.

More liquid strategies, which tend to be more common, with 30-day notice periods will know the full extent of withdrawals at the end of the month.

Hedge fund executives are now talking about year-end redemptions of about 15-20 percent, although Man Group (EMG.L) Chief Executive Peter Clarke has estimated it will be more like a quarter or a third.

"I think aggregate redemptions over the last quarter could be 20-25 percent," said Cem Habib, co-founder of fund of hedge funds firm Altedge Capital.

"Some funds are seeing 50 percent or worse, while some are seeing as little as 5 percent," he said.

However, many hedge funds have already built up cash levels, either to get out of falling stocks or to protect against possible redemptions.

Atticus European, for instance, has raised cash and U.S. Treasury positions to more than 50 percent as it cut exposure to falling markets, while Sassan Zaker, fund of funds manager at Bank Julius Baer, has 30 percent in cash and plans to raise this to 50 percent by the end of the year.

"Most managers have spoken to their large investors and most have been preparing for year-end redemptions by raising cash," said one fund of hedge funds manager who asked not to be named.

"Most are not sitting waiting for final numbers."

NEXT YEAR

The FTSE 100 .FTSE index has already risen or fallen by 5 percent or more on 13 separate days over the past two months, partly because funds have been dumping assets.

Some of the selling pressure may be pushed into next year.