Equity is the first loss tranche

Nov. 17 (Bloomberg) -- Regulatory filings last week by 38 hedge funds with more than $1 billion in assets each show that selling and market declines cut the value of their reported holdings by about 30 percent to $273 billion.
The $1.7 trillion industry, which accounts for about a third of U.S. equity trading, continued to retrench in the past two months, contributing to the 25 percent decline by the Standard & Poor's 500 Index since Sept. 30. At least 75 funds have liquidated or halted redemptions this year. With the Nov. 15 deadline for year-end withdrawal requests now past, fund managers may be forced to unload more stocks to pay off clients.
Money managers who oversee more than $100 million of equities more must file, within 45 days of the end of each quarter, a Form 13F with the Securities and Exchange Commission that lists their U.S. exchange-traded stocks, options and convertible bonds. The filings don't show non-U.S. securities or how much cash the firms are sitting on.
Almost all the major hedge funds submit their reports within a few hours of the deadline, which was Nov. 14 for the third quarter.At Tudor Investment Corp., the Greenwich, Connecticut, hedge-fund group founded by Paul Tudor Jones, 13F holdings fell to $453 million from $5.7 billion. Jones said markets face more selling from managers.
``Our concern now is less over year-end fund redemptions, as record cash balances have already been raised in anticipation, but with prospective fund closures,'' Jones, 54, said in an Oct. 31 report to his clients. ``This latter event represents a tipping point at which a fund's call on the market for liquidity goes non-linear.''
This year has been the worst on record for hedge funds, with the average partnership losing 16 percent through October, according to data compiled by Hedge Fund Research Inc.
Market losses and withdrawals may cut hedge-fund industry assets to about $1 trillion by the middle of next year, down almost 50 percent from their peak in June, said Tobias Levkovich, a Citigroup Inc. analyst, in a report yesterday. Some managers sold stocks to build cash that they can use to meet client withdrawals triggered by subpar returns. Even managers who are outperforming have gotten redemptions because their clients need cash and their other funds are frozen.
Funds have also been forced to pare their holdings as prime- brokerage units of investment banks cut back on lending and raise the price of the loans they are willing to make. And many funds may have sold stocks as the quickest and easiest way to raise cash to pay down loans on bets on other assets that had dropped.