When Hedge Fund Investors Lose Confidence

Jenny Anderson is worried that when hedge-fund investors get their monthly statements in July, they'll start to panic.

Nervous investors are awaiting monthly numbers, which most hedge funds provide. If the investors want out, and they have fulfilled any requirement to keep the money in the fund for a certain amount of time, they can pull their capital. Too many redemptions can force funds to sell into a bad market, resulting in worse losses.

But if they pull their money out of hedge funds, where will they put it? Long-only ETFs are hardly where you want to be invested in a down market, while the whole point of hedge funds is that they outperform during bear markets and periods of high volatility. It seems weird to run away from them just as they're about to come into their own – unless you never really believed in them in the first place, and just wanted an expensive way to get leveraged exposure to the broader market.

But this does raise an interesting question: let's say that a hedge fund loses 3% in a month. Are investors, at the margin, more likely to take their money out as a result (a) if stocks are falling, or (b) if stocks are rising?