Halting Hedge Fund Redemptions ~ The Risk Averse Alert

Thursday, December 04, 2008

Halting Hedge Fund Redemptions

Just a quick technical commentary today, because absolutely nothing about my outlook has changed...

Despite on Monday having assumed bottom is near, but not yet in ... yesterday I presented a possibility suggesting bottom, indeed, has been reached. Appreciating the value of a contrarian's vision and not at all worried about what another 300,000 Americans put out of work will mean for immediate economic prospects (let alone the market's) ... I now maintain this latter position as my preferred view...

OEX 5-min

As you can see, a price-RSI divergence preceded today's late-day sell-off. So, now we await a price-RSI divergence on the sell-side to indicate an imminent charge higher. Since several possible scenarios could develop, I'll not venture anything more specific today. The general outlook remains much as I indicated yesterday.

So, what should we make of an increasing number of hedge funds employing provisions suspending redemptions? One specific concern I have is how this exacerbates capital availability — one of the principal causes for the stock market's awful performance in '08.

CNBC's Melissa Lee reports another $200+ billion is to be redeemed by year end. So, should we be worried?

Well, Barton Biggs says, "Fears are overblown." Likewise, Citigroup believes the problem is being "overstated." Given "gates" preventing hedge fund redemptions, these contrary views hold some weight.

One compelling historical observation supporting a contrarian view is well-stated by Biggs...
In every bear market I have seen, the doomsayers concoct a statistical argument that the glory days for stocks are over, because a flood of selling by brutalized investors is inevitable, and the buyers have no money. This case always seems most compelling close to the end of the declines and is always marked by a wave of media pronouncements. Remember Business Week's "The Death of Equities" cover in 1980? Recent covers from Business Week and The Economist have had similarly dire alarms.

Still, though, what about the matter of capital availability? If a hedge fund investor — say, a pension fund — cannot withdraw its money to meet liabilities, then what?

Well, all I can say is if the trend is your friend, then the Monetarist Monkey twins, Paulson and Bernanke, certainly have got to be all over this. They're probably only a 3 or 4 letter acronym away from the next hyperinflationary solution. Is there an investor alive who could possibly doubt this likelihood?

Tonight I came across the following interview Charlie Rose did with Bill Ackman a few weeks ago. Although it offers an insider's clarity on matters surrounding the present crisis, and should leave you with a sense things are not as bad as they sometimes seem ... nothing at all changes my conviction toward the inevitable consequences of the "Inflate or Die" paradigm the U.S. Treasury has come to fully embrace...

(Check out cash as a percentage of total assets)

Fast Money
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