Hedge Funds are Getting Cheap Money, Yet Investors Flee

Yesterday Reuters reported that investors’ net withdrawals from hedge funds last month reached their highest levels in two years. According to GlobeOp’s Capital Movement index, net hedge fund outflows in June were .2% of assets under administration for the month, the highest outflow levels since October of 2009. Perhaps some of the rationale for the slow-flowing cash was the fact that hedge funds returns were in the red. According to Reuters, “The average hedge fund lost 1.22 percent in performance terms last month, according to Hedge Fund Research, after losing 1.14 percent in May as managers struggled to deal with market uncertainty over Greece’s attempts to push through austerity measures needed to secure a bailout.”

In spite of the news that investors seem to be bailing on their hedge fund managers, banks are offering them cheaper lines of credit, says the FT. “None of the dealers [20 largest securities dealers], who the Fed said provided nearly all the financing for hedge fund purchases of securities, tightened terms in the period from March to May. Eleven said they eased financing terms to hedge funds. Of the lenders that eased terms, nine said more aggressive competition for hedge fund business was a cause. Eight said the improved strength of their counterparties was a factor and seven said their own institution’s willingness to take on risk was a factor.”

Regulators aren’t worried about the situation, as the Fed offers some sense, saying banks are lending at low rates due to lack of demand for funding at the hedge funds due to low trading volumes and turbulent market conditions. The Fed concludes, “The leverage used by these counterparties is constrained not by the availability of additional funding but by their risk appetite and investment objectives.”