From The Financial Times

Investors pulled at least $43bn from US hedge funds in September as market turmoil led to unprecedented withdrawals, an analysis by a leading research house shows.

The data from TrimTabs Investment Research – which was to be sent to clients late on Wednesday – come as hedge funds are working to prevent far bigger redemptions by the end of the year, when many funds give investors a chance to take out money.

Withdrawals can lead to a vicious circle in the markets, as funds sell holdings to return money to clients, depressing prices and prompting further redemptions. ...

The chief executive of a leading alternative investment manager said he expected the hedge fund industry to shrink by 50 per cent in coming months – with half the decline coming from withdrawals and half coming from investment losses.

Conrad Gunn, chief operating officer of TrimTabs, said the $43bn in September withdrawals would mark “the beginning of what we expect to be a series of outflows for the remainder of the year. We expect October outflows to be larger”.

The industry, which manages close to $2,000bn, has experienced outflows during only a handful of months previously, including a small outflow in April of this year.

If you ask me what makes me most bearish, what makes me think that the S&P 500 could go to 600, it is not the recession.  We have gone through recessions before, even credit-induced ones. 

No, what makes me very worried and why I am not deploying capital just yet, even though the market is  getting cheap, is the tsunami of hedge fund sales that may be on the horizon. 

Recessions we have seen before.  Highly leveraged fund liquidation by over-compensated money managers in an industry that gets paid not to take losses whose time horizon is next quarter and whose clients thought they would earn money in any market environment we have not seen before.

That is what worries me.