• Paul Kedrosky: A Simple Hedge Fund Outflow Model

In essence, I’m aging hedge fund inflows and saying that we will see a blended 40% (higher in later years, lower in earlier years) demand for redemptions from investors in the 2005-2008 period . . . I then figure that turns into almost $200-billion in outflows, or a little less than $2-trillion in asset sales at an average of 10x leverage.

. . . with TrimTabs saying that we had $43-billion in September outflows, and assuming managers expect at least a 50% higher figure in October, that means another $60-billion in selling. We are then about half-way through the unwinding.

Tough nut to crack. Paul’s given it a try - would be good to see some sensitivity analysis to get an idea of how worse it can get. The $2T asset sales seems on the lower side to me, if I put it in the context of $30T+ loss in global market cap.

• Market Watch: Citadel’s main fund down over 25% so far this year

Credit default swaps spreads on Citadel were quoted at more distressed levels on Wednesday, suggesting investors are concerned about the hedge fund firm. However, these contracts don’t trade much and often act as a proxy for investor sentiment on the hedge fund industry as a whole.

Citadel’s main hedge fund is down between 26% and 30% so far this year, based on estimates through Oct. 10, . . . Meanwhile, the firm’s market-making funds are up roughly 30% during the same period.

 Convertible arb hedge funds lost more than 12% on average in September, leaving them down almost 20% this year, . . . The shares of some companies involved in high-profile mergers and acquisitions have also been disrupted in recent weeks, partly because hedge funds are being forced to unwind merger arbitrage trades to raise cash for possible redemptions.

• Breaking Views: Great leap backwards

China has paused for breath – and knocked the wind out of the commodities boom. Rio Tinto, the Anglo-Australian mining group, warned on Wednesday that the world’s biggest consumer of steel, coal, aluminium, copper and seaborne iron ore had started to show signs of a slowdown.

The Middle Kingdom accounts for more than 40% of the global growth in demand for major commodities.

Given the roughly six-month lag between economic stimuli and commodity prices, what Rio is seeing is most likely to be the effect of China’s own self-made credit crunch – the result of past attempts by the administration to dampen down growth by tightening up credit. There may be further contagion in the post if exports slow in earnest.

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