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Biggs: No Hedge Fund Tsunami Ahead

By Greg Brown   |   Tuesday, 11 Nov 2008 10:17 AM

Barton Biggs, managing director of hedge fund Traxis Partners, says he doesn’t see the redemption tsunami predicted by billionaire George Soros and others.

Soros has said he expects two-thirds of hedge funds to be closed down by a wave of redemptions as investors cash out. Economist Nouriel Roubini went so far as to warn that the resulting rush of stock sales would shut down stock markets for two weeks or longer.

Not gonna happens, says Biggs, a former Morgan Stanley strategist, writing in Fortune.

During the bear market of 2000 to 2003, hedge funds still posted positive returns, Biggs points out, and the result was a boom in the industry.

“Big money and greed attracted less qualified, inexperienced, and trading-oriented participants,” he admits, but the exit of those fund managers won’t kill the business.

“For one thing, the panic has abated, and since most funds have losses to make up before they can begin to earn their performance fee again, investors who redeem now are forgoing a free ride,” Biggs says, with the caveat that, of course, a fixed fee remains in place.

Sure, several thousand small funds might close, but the big “multi-strategy” funds will stay on, he says.

Biggs expects $350 billion to leave the now $1.4 trillion hedge fund market by the middle of 2009, of which $150 billion is already gone. If the remaining $250 billion were to evaporate, no big deal, Biggs says.

The bears are worried about leverage, meaning hedge funds would have to sell two to three times that amount to cover redemptions, he says. Biggs is less concerned.

“Hedge funds have heard the redemption footsteps: They have already sold down their long portfolios and tremendously reduced their gross book and leverage. It is a fact that hedge fund margin debt has been declining since July 2007, and prime brokers report massive hedge fund cash holdings,” he says.

While Biggs may be right that hedge funds won’t necessarily collapse, they might not return to the recent glory days, either.

A new survey released by fund research firm Morningstar points out that half of financial advisors to the wealthy believe interest in hedge funds will diminish over the next five years.

It hasn’t helped that most hedge funds lost 20 percent this year after years of promising to make money in any market, up or down, in exchange for fat fees.

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Barton Biggs, managing director of hedge fund Traxis Partners, says he doesn’t see the redemption tsunami predicted by billionaire George Soros and others.Soros has said he expects two-thirds of hedge funds to be closed down by a wave of redemptions as investors cash out....
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