Hedge funds have been aggressively moving into ... cash. A number of the largest U.S. firms are holding cash balances or have markedly decreased leverage in response to uncertainty about the direction of markets—which may have helped them during the extreme volatility in August.
Regiment Capital Management in Boston had 60% in cash in July, according to investors, and Balestra Capital had built up as much as 65% in cash around the same time. Meanwhile, King Street Capital Management, which started 2011 with roughly 60% of its $19.5 billion in cash, is slowly reducing its stockpile.
“People are losing money, so managers are staying with their high-conviction positions and unwinding some of the others to put more money in cash,” one fund-of-funds investor said.
Those in cash before the summer maelstrom hit had lower earnings earlier in the year but were protected from potentially large losses. Others had to scramble. “We’ve been speaking with a number of our managers over the past few weeks and a very common sentiment is that they’re bringing down their exposure levels and raising their unencumbered cash percentages,” said one pension fund investor. “They’re not only raising cash, but also moving money out of money market funds and putting it with their prime brokers to be much more careful with their cash management.”
Some are telling investors they have plenty of money set aside to protect against margin calls, changes in financing terms and severe market movements. HBK Investments was holding about 30% of excess capital in the second quarter across four of its funds, according to an investor letter. “We have a strong liquidity position,” the letter said.
After cashing out of several positions at the end of 2010 and facing limited opportunities, King Street was heavily in cash earlier this year. But the firm has recently been dipping a toe back into the markets, having put nearly $2 billion of its reserves to work.
The move to cash has not been limited to long/short equity funds or macro strategies. Many event-driven managers have also been waiting on the sidelines. “Some funds are bringing down their exposures; a lot are putting short positions on and adding portfolio hedges, and others are bringing down exposures to certain sectors, like financials,” said the pension investor.
Third Point Management, for one, has been taking down some of its exposure in materials and energy, said one fund-of-funds investor.
According to Third Point’s second-quarter investor letter, its portfolio exposure had decreased to 36% from 64% during that time. In the first two weeks of August, Third Point Partners lost 0.43% but was still up 2.06% for the year as of August 12.
“Many hedge funds were pretty defensively postured going into this year, and my guess is that pretty soon they’ll start buying assets,” said Jim Berens, co-founder at fund of funds Pacific Alternative Asset Management. “The thing I hear over and over again is ‘I’m not going to be a hero and catch a falling knife.’ Now is not the time to do a hero trade, even if that means losing the first 1% to 2% of the gains.”
