Mom-and-pop investors fled mutual funds in record numbers this month, yanking a whopping $58.9 billion from stock mutual funds in the first 10 days of October.
The last time investors fled mutual funds on such a large scale was July 2002, when $52.6 billion was pulled, according to equity market research firm TrimTabs Investment Research.
Typically, when small investors pull the plug on their investments, it’s a sign that the worst is over. And stocks soared shortly after the withdrawals in 2002.
But things may take longer to shake out this time around, according to a report from the Sausalito, Calif., based TrimTabs.
That’s because, unlike last time, bond mutual funds and hedge funds are also suffering outflows.
During the last stock-market crash, investors funneled money they pulled from stocks into safer bonds and bond funds, as well as hedge funds, which were outperforming stocks.
This time around, investors are cashing out of those two alternative asset classes, said Conrad Gann, chief operating officer of TrimTabs. “The economy is so weak people need the cash to pay their mortgage and other expenses,” said Gann. “We just don’t have an environment that’s right for inflows.”
Indeed, hedge funds suffered a record $43 billion in redemptions in September alone, according to the research firm, which has been tracking the data since 2000.
The previous record was $6.3 billion in October 2001, said Gann.
Hedge-fund redemptions are expected to worsen next month, driven by poor performance, said Gann. And unlike with mutual funds, the hedge-fund withdrawal process can take months, thus extending the pain.
“The liquidity structure of hedge funds just drags out the process,” said Gann of the $2 trillion industry.