Closing the Gates of Hedge Hell

Discussion in 'Wall St. News' started by patchie, Oct 31, 2008.

  1. patchie


    Closing the Gates of Hedge Hell

    Hedge funds are fed up with clients redeeming their money:

    Dozens of hedge funds have told investors they cannot get their money back right now as managers try to limit a wave of redemptions to safeguard all their clients' investments -- as well as their own futures. Only a few months ago, hundreds of the world's estimated 9,000 hedge fund managers made it tough for wealthy investors to put money into their funds by requiring high investment minimums of $1 million or more and charging heavy fees.
    Now managers are making it hard for investors to get out.

    "Everyone is looking at their gate provisions (mechanisms that limit redemptions) and what rights they have to close their gates," said Timothy Mungovan, a partner who advises hedge funds at law firm Nixon Peabody LLP. "It is a phenomenon that has been occurring for some time and is picking up pace now."

    On Thursday, Knight Capital Group's Deephaven Capital Management halted redemptions at two of its hedge funds.
    Recently, hedge fund firm Basso Capital told investors it was postponing redemptions. Hedge fund firm Ore Hill Partners imposed a gate in late August.
    Before that Drake Capital Management and Pardus Capital Management began restricting clients' departures and Ellington Capital Management stopped allowing investors to exit one of its portfolios last year.
    Blocking investors' exits, even if only briefly, was once a highly unusual move that often signaled a hedge fund was on the verge of collapse, managers and investors acknowledged.
    That is changing now as ever-more managers and investors engage in a tug of war over who can receive money right now.

    "Hedge funds are trying to act as the ultimate fiduciary to their investors and the way they are doing that is by restricting the capital that can leave," said Perrie Weiner, a partner and international co-chair of law firm DLA Piper's securities litigation practice.

    Managers argue that, if they had to return investors' money exactly when investors demanded, funds would have to unload securities at fire-sale prices and many clients who were not looking to get out would be hurt by those moves.
    Already, hedge funds have been blamed for accelerating the stock market's tumble by dumping shares to get liquidity.
    "Restricting redemptions allows the managers to withhold selling into unfavorable markets," said Michael Tannenbaum, a partner at law firm Tannenbaum Helpern Syracuse and Hirschtritt LLP, explaining that panic selling in these markets can be "harmful to both sides: the investor and the redeemer."
    But investors are not wholly convinced by this argument. Many are still asking to get their money back now.

    Spooked by hedge funds' worst-ever returns at a time the average fund has lost 20 percent this year, pension funds and wealthy individuals alike are leaving hedge funds faster than ever before, lawyers and managers said.

    Between July and September, investors pulled out a record $31 billion, which helped shrink the industry 11 percent to $1.7 trillion. And more redemptions are expected to flood in by November 15, the deadline to get money back by year's end, industry lawyers and investors said.

    The wave of redemptions is understandable, especially given the poor performance, but I would caution investors not to pull out money right after a steep decline in equities. You are better off waiting for a relief rally to recover some of the losses.
    Other hedge funds are offering their clients the option to lock-up their money for a reduced management fee or receive "redemption shares" instead of cash if they decide to quit:

    One of Britain’s best-known hedge funds, RAB Capital, has stopped investors cashing out of a second of its flagship funds. Investors in RAB’s Energy fund - which has lost more than 50% of its value this year - have been told they will not be able to liquidate their holdings.
    Those who want to quit will be handed “redemption shares” instead of cash - a promise on behalf of the fund to pay back investors as and when it can sell out of enough stocks.
    The fund, run by Gavin Wilson and Mark Redway, is entitled to do this under existing agreements with investors.
    Those who opt to stay in are being offered the chance to lock up their money for three years in exchange for a reduced management fee. The proposal is based on the deal offered to investors in RAB’s Special Situations fund, run by former chief executive Philip Richards.

    Investors have until Friday to tell the firm whether they want to accept the Energy fund’s lockup deal or sign up for the special shares.
    The fund, which was worth more than £1 billion at its peak, has been one of the biggest backers of oil and gas-exploration firms on London’s Alternative Investment Market.
    It is understood that the fund has held informal discussions with a number of large oil companies interested in buying some of its holdings. The fund mostly holds large stakes in small companies - investments that have become almost impossible to trade in today’s volatile environment.
    RAB Capital said: “The fund managers have exercised their right to make redemptions in specie in light of the difficult market conditions.”
    Its latest problems come amid mounting expectations that the hedge-fund community will be decimated by the global market meltdown. Banks have been calling in credit lines extended to a number of funds, which has forced them to sell shares to raise cash.
    Former US Treasury adviser Nouriel Roubini warned last week that up to 500 hedge funds would collapse within months.
    Kenneth Griffin, the founder of hedge fund Citadel with $17 billion (£6.6 billion) in assets, held a 45-minute emergency conference call on Friday to quell fears it was in trouble by going public with information it usually guards militantly.
    The call was intended for a small group of bondholders but almost 1,000 investors, analysts and other market players dialled in after a Wall Street blog said Citadel was meeting Federal Reserve officials to manage a pending collapse.
    On the call, Griffin and chief operating officer Gerald Beeson confirmed the firm had suffered losses of 35% in its two core funds - Kensington and Wellington - as a result of the global financial crisis.
    Beeson stressed the severity of the financial crisis: “To call it a dislocation doesn’t go anywhere near what we’ve seen. We’ve seen the near-collapse of the world’s banking system.”
    They said Citadel had not had to sell assets to meet investor demands to return their capital and that the firm had more than 30% of its assets in cash - or close to $6 billion. It has another $8 billion in credit available from commercial banks around the world.
    Poor performance has also spurred London-based Centaurus Capital into action. It is proposing to return 30% of cash to investors in its Alpha fund and lock up the rest of the money for two years with reduced fees.
    If approved by investors, the plan would take effect on December 1. As an interim measure, Centaurus is restricting the amount of money investors can withdraw to just 10%.
    And GLG may decide to suspend redemptions on its $1.4 billion market-neutral fund this Friday – the last day of the month and typically when redemption notices come in.

    Wow, things are shaky in Hedge Land. No wonder they are closing the gates, cutting fees and holding emergency conference calls with jittery investors to calm their nerves.
    Today, Citadel announced it plans to shut down a $1 billion portfolio that invests in other hedge funds and put the capital it invested in the fund into other businesses. Smart move.
    But while some hedge fund managers are licking their wounds, others are raising money in a difficult environment:

    Steven Cohen, David Einhorn, Paul Singer and Alan Howard are doing what most hedge-fund managers can't these days -- raising money from investors.
    Singer's Elliott Management Corp. added $3 billion in the third quarter and Howard's Brevan Howard Asset Management LLP garnered new cash as they posted investment gains in a year when the average fund has lost 20 percent, people with knowledge of matter said. Cohen's SAC Capital Advisors LLC and Einhorn's Greenlight Capital Inc. have allowed investors into funds that had been closed since 2005, with Einhorn seeking several hundred million dollars this month.

    Follow this link for the rest - too long to post.
  2. patchie


    "Hedge funds are trying to act as the ultimate fiduciary to their investors and the way they are doing that is by restricting the capital that can leave," said Perrie Weiner, a partner and international co-chair of law firm DLA Piper's securities litigation practice.

    Managers argue that, if they had to return investors' money exactly when investors demanded, funds would have to unload securities at fire-sale prices and many clients who were not looking to get out would be hurt by those moves.

    Imagine that, hedge funds worry about a run on the bank because their model is not set up to handle it and was the hedge funds that ran on the banks and created this crisis. If only the banks could have refused the funds the way the funds refuse their clients.

    Doesn't this all imply that the hedge funds are as risky as the banks? So they are not as smart after all, just opportunistic that theuy are unregulated and banks are. I want to see the first lawsuit by a client refused redemtion.
  3. W4rl0ck


    good post.
  4. Wow. I don't know sh*t but that sounds like it could be significant the next few months.
  5. C6H12O6


    They are history.
    The German government and the ECB are behind Porsche.

    The hedgies decided to go against the central banks, pushing commodities, raising inflation and social unrest, destroying the real economy. And now they get what they deserve: death, very painful death. :D
    Those were the times when the shadow banking system got so big, that they tought to be more powerful than the money masters.
    How can you fight a money printing machine with its own money ? Morons.

    -Whose losses are these ?
    -Who are hedgies ?
    -Hedgies are dead, baby. Hedgies are dead. :D
  6. Hedge fund growth ( both AUM and actual numbers) was very very parabolic(11 fold in last 6yrs), most of these funds are being run by academic type mutual fund manager characters who are simply living off management fees and betting the ranch on silly ideas (fertiliser,solar,tractors,CMBS,JPY/NZD). The TRUE ORIGINAL HARDCORE TRADER type funds will survive. Most of these sinking funds were focused on single industry or asset type or market dynamic, and as we all know or have learnt the hard way, markets can evolve rapidly and viciously(spelling?) with little regard for your PhD or theory. I suspect most of these guys are in a classic deer looking into headlights situation, they know what to do, but simply stunned. If "retail traders" myself included, a few of my mates and a lot/few on this board can squeeze buckets of juice in this environment one wonders whether the truth is being told or these Hedgies are genuinely talented only in bull markets.......:cool:

    Cygnus Atratus over and out...
  7. * Banks are regulated and wrote down around a half a trillion dollar in losses worldwide. Hedge funds - on average - had very little exposure to toxic debt. Banks though did, in huge size. Don't mistake regulation for brains.
    * How did hedge funds start a crisis by creating bank runs? Hedge funds going bust just means investors lose their money, period. If banks go bust one by one it can cause a systemic collapse of the entire financial system. The banks are the major root of this crisis by lending out money to deadbeats and leveraging up their books to 30:1 leverage with exotic and toxic 'investments'.
    * Most US hedge funds are limited partnerships. A redemption request should never never deteriorate the NAV of the remaining partners. That's why redemption safe guards are in place that allow the general partner to liquidate a portfolio over the course of months or a full year rather than forcing a firesale within a matter of a few days. There won't be any meaningful lawsuits because limited partners have agree to those redemption rules before they put money into funds.
  8. squeeze


    So much for absolute returns.

    Mostly just Glorified mutual funds with high fees. A cull is well overdue.
  9. patchie


    So...When the rumor circulated that SAC and Citadel were pulling their money out of Lehman that was not similar to a redemtion? It certainly impacted the market in Lehman as the news instantly altered the trading.

    As for hedge fund redemtions, yes there are rules but fund managers seem to be altering the rules in tough times to protect THEIR fees and investment. Those seeking redemtion are doing so according to their contracts and are being turned down. Hedge Funds are so fearful of this that they are altering the terms to entice people to stick with it.
  10. Now look at those guys that DID NOT pull their money out of the Lehman prime brokerage. They're bust! They still can't access their funds and will likely get back pennies on the dollar.

    Anybody that pulled out their money out of the scam operation that was Lehman did the right thing.

    Fuld is the one to be blamed for leveraging up his book 50 to 1, not his brokerage clients who lost trust in him.
    #10     Nov 1, 2008