Why Hedge Fund Withdrawals Matter

Nov. 28 was my friend's birthday. It was also the day when investors in his hedge fund could formally begin requesting withdrawals. Needless to say, he cared less about his birthday.

Withdrawals at hedge funds are a critical indicator. This should not be downplayed. What happens in alternative investments matters to the market overall. Here's an interesting WSJ article on the topic:

The average hedge fund is down more than 16% this year, according to data provider Hedge Fund Research. The Standard & Poor's 500-stock index is down 40%.

The continued deterioration of the performance of hedge funds heightens concerns that they will be forced to sell more of their good assets in order to satisfy the backlog of redemptions. That selling could put added stress on the markets, as the global hedge-fund industry manages more than $1.5 trillion.

I agree.

So how severe will withdrawals be? Tough to say, but I wonder whether they'll be as severe as some hedgies fear. Why? Where else can the money go? Investment dollars can stay in cash for only so long, and hedge funds still are solid long-term performers. One caveat: nothing is logical about today's markets.