Think “bank run” and most people imagine a scene from “It’s A Wonderful Life,” or recall the lines snaking around the block at mortgage lender IndyMac in California this past year.
But it can happen to the super rich, too. Panic over Bernard Madoff’s alleged $50 billion ponzi scheme has touched off increasing concerned among hedge fund investors. Years of outsize returns and precious little evidence of how the funds work has some wondering, Is my money safe?
So, fund managers say, many are heading for the exits.
“We have become the A.T.M. machines for people that need cash,” hedge fund manager George Weiss told The New York Times. He says he’s seen 35 percent of his money go to redemptions.
Hedge funds, which often promise investors positive returns in nearly any market, are down 16 percent in the first 10 months of the year. The overall market was down by easily double that.
Not bad, but the rich tend to prefer no loss at all. Feeling burned, big investors took out $40 billion from hedge funds in October alone, says Hedge Fund Research. Billionaire George Soros just a month ago said that he expects only a third of the roughly 10,000 existing hedge funds to remain in business.
College endowments, pension funds, states — they all see shortfalls ahead and feel the panic over the Madoff story. And that’s on top of dismal stock market returns. Harvard reportedly lost $8 billion just four months. California says it will be broke by spring.
The ripple effect could run quite deep: Spanish banks had trades linked to Madoff, and other hedge funds, especially funds-of-funds, put in with him.
Even funds that did not directly invest in Madoff’s secretive operations could face losses because their investors might need to suddenly redeem for cash to recover from a total wipe-out, thanks to Madoff.
"Is this going to be the nail in the coffin for a few hedge funds already teetering on the edge, I absolutely think so," Peter Turecek, a managing director at risk consultancy Kroll, told Reuters.
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