Investor redemptions, not trader conviction, forced hedge funds to unwind losing positions

Evidence

In the case of hedge funds, the issue was investor rather than manager queasiness. Most funds did not have LTCM’s long capital lockup: “they knew that investors were starting to drain money if they saw more than 15 percent [loss] or whatever… They knew that if they showed big losses a lot of investors would want to get out. They wouldn’t wait until they lost 80 percent of their money … so that was the behavioral constraint that led to people unwinding positions even though they knew that those positions had value in the long run. They just had no choice.” (Kaplanis interview) (The fourth quarter of 1998 saw net withdrawals from hedge funds of about $6 billion.) — Donald MacKenzie, An Engine, Not a Camera, 1046

Categorization

• XREF: connects to: Value-at-risk limits force position liquidation once breached — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1048; Market beliefs about a fund’s portfolio can be wrong yet still drive fire-sale pricing. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1061

Broader Connections

• Value-at-risk limits force position liquidation once breached #complicates (0.72) — Donald MacKenzie, An Engine, Not a Camera, 1048
• Market beliefs about a fund’s portfolio can be wrong yet still drive fire-sale pricing. #complicates (0.72) — Donald MacKenzie, An Engine, Not a Camera, 1061