Mutual funds cash reached record lows of 3.4% in June. Their capital buffer would be effectively wiped out by a 4% surge in redemptions if customers get nervous. "Enter liquidations".
Chart and comment from Zero Hedge, courtesy of Roy Ashworth. Clarification added from "Poog".
Update August 10th. Redemptions surge near record - Zero Hedge.
Update September 28th: Hedge Fund Redemptions Arrive: 25% Of Hedge Funds Industry To Follow Into That Good Night
Update December 30th from Zero Hedge: $135 Billion Redeemed From US Equity Mutual Funds In 2011, 34 Of 35 Consecutive Weekly Outflows
This makes no sense. Describing their cash as a percentage of their holdings masks the fact that the cash position is of a fixed dollar value. If the absolute value of the fund declines, the dollar value of the holdings remains constant but its percentage of holdings INCREASES.
ReplyDeleteWhere the risk is is with respect to another statistic - that margin positions are at near record highs. A 512 point drop in the Dow should trigger a lot of margin calls forcing individuals to divest themselves of positions to raise cash and cover their margin. In this process, if mutual fund redemptions are too large and overwhelm their low cash reserves, the funds are then forced to sell assets creating positive feedback into the selling frenzy.
At 2.26 am as I write this, Dow futures are down another 82 points. Friday may be crucial to survival in this market.
Actually, on rereading the post we are saying the same thing if by "absolute value" is meant redemptions.
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