Think the market is liquid? Think again, especially if you are one of the unlucky ones who bought into the SAC get rich quick dream and now just want to get your money out of the world's most notorious hedge fund. According to Bloomberg [4], the CT firm that has been branded by the government as a "veritable magnet for market cheaters," has "refused clients’ requests that the firm speed up payouts on the billions of dollars earmarked for withdrawals, according to three people familiar with the discussions."
SAC, which faces a midnight deadline for redemption requests from investors who want to pull money from the firm, has told clients that final payments will be made at the end of the year. Some investors have pushed Cohen to give clients their money back before then, fearing that the government could freeze the funds’ assets, said the people, who asked not to be identified because Stamford, Connecticut-based SAC is private. The government has said it doesn’t plan on restraining assets.
SAC started the year with $15 billion of assets, about $6 billion of which belonged to outsiders. As insider-trading probe against the firm intensified, clients redeemed more than $3 billion in the first half of 2013, which is being returned over the course of this year. SAC’s executives have said they expect the firm to start 2014 with about $9 billion in assets and that virtually all outside investors will be gone by then, according to people familiar with the firm.
“People want to get out of the fund and be done with the headline risk,” said Larry Chiarello, a partner at SkyView Investment Advisors LLC in Shrewsbury, New Jersey, which invests in hedge funds.
Now while one can see why the future family office may enforce contractual lock up rights on the exodus of external clients, it doesn't explain it. Especially if, as conventional wisdom says, SAC is invested purely in liquid securities, for a total of somewhere around $10 billion. Should be one week of VWAP programs at most right? Well, not if as we previously observed [5]when accounting for leverage, SAC's true gross up may be somewhere around $40 billion. That would take many more selling VWAP programs. And once the block-sniffing algos figure out what is going on, watch out below.
All of which goes to the fundamental thesis: the market which over the past 4 years has been levitating on virtually no volume, is massively illiquid and very much unprepared for any size selling. SAC's implicit "gating" just confirmed that.
Yes, one may buy puts to hedge downside, but when liquidation events take place and the only left option is to sell, then things go bump in the night. At that point all those who have bet their careers on the fact that levitation to the upside is irrelevant, will certainly want to polish their resumes.
Finally, it goes without saying that in the liquidity prisoner's dilemma, he who sells first, sells best.