EFG hedge fund unit feels the heat from investors
The manager may benefit in the long term from not restricting withdrawals
It seems that even being one of the few successes in your sector is not enough to make all your investors stay loyal. Marble Bar Asset Management, bought by private bank EFG International at the end of 2007, had almost half its assets under management pulled away by investors last year despite being one of the few hedge funds to protect its clients from losses.
This is one of the first insights into what the massive draining of capital from the hedge fund industry as a whole means to a specific company. Named after an Australian township known for its extremely hot weather, Marble Bar has itself been burnt by its decision not to stop withdrawals.
Marble Bar’s three main funds ended last year between 2.3% down and 0.25% up, said investors. The average hedge fund lost 19%, according to database Hedge Fund Research, whereas shares slumped by 43%, according to data provider Bloomberg.
Marble Bar’s investors took about 45% of their cash out during the second half of the year, according sources close to the firm. Marble Bar allowed investors to redeem monthly with 30 days’ notice, because its funds trade liquid shares in large companies, according to Gilad Hayeem, its chief executive.
By contrast, he said many funds with 60 days’ notice had locked their investors in, leaving relatively few funds still giving investors quick access to their cash. Investors used these, said one manager, “like desperate customers use an ATM”.
Nevertheless, Hayeem said Marble Bar would do the same again. A source close to the firm said: “You have to look very hard at your investor base and understand why they’re redeeming. For the industry to succeed, and be able to look investors in the eye, you cannot promise one thing on the way in, only to change the rules on the way out.”
Investors pulled $384bn (€306bn) from the $1.4 trillion industry last year, the most in one year, according to data provider Eurekahedge. Huw van Steenis, head of European banks and financials research at Morgan Stanley, said “the rout” was not over yet.
US institutional investors could form a second wave of withdrawals in the first quarter of this year, he said, depriving the industry of another 30% of its money after European investors pulled out most of what they wanted in the second half of last year. Van Steenis said: “The US bias to institutions [investing] and longer redemption notices means we expect redemption catch-up in the first quarter of this year as institutions and endowments suffering from liquidity mismatches reduce allocations.”
European managers Henderson Global Investors, GLG Partners and RAB Capital, and US peers Och-Ziff Capital Management and Fortress Investment Group suffered outflows of between 18% and 31% in the second half of last year, according to analysis by van Steenis. GLG, RAB and Fortress restricted withdrawals from some of their funds.
Oliver Schupp, head of alternative beta at Credit Suisse, said about 25% of all hedge funds have restricted withdrawals. Fortress limited redemptions from one fund, delaying payments by one week, said a source close to the firm.
On average, Europe’s hedge funds lost 11.6% on their investments last year, according to publisher HedgeFund Intelligence, and more than 100 restricted withdrawals since mid-September.
Simon Luhr, who was Marble Bar’s chief executive before leaving in 2004 to found asset manager SW1 Capital, said what happened at Marble Bar was typical of the broader industry: “Investors are redeeming from the better, more liquid and well-run funds. There are so many hedge funds with gates up. Funds of funds and wealthy individuals want their money back, but the only place they can get it is from firms that trade liquid securities and which have not locked in assets.”
Van Steenis said funds of hedge funds and wealthy individuals led redemptions last year. The fund of funds invested with US manager Och-Ziff Capital Management, he said, were responsible for most of fourth-quarter withdrawals.
Van Steenis said: “Our interviews with a number of unlisted players confirms that many European firms saw redemptions of between 25% and 30%. Firms with a skew towards institutional investors have typically fared better, with redemptions of about 10% to 20%.”
He ascribed the draining partly to losses often magnified by leverage, to investors rebalancing and deleveraging their portfolios, and to redemptions by those who saw hedge funds as too risky.
Phil Irvine, co-founder of consultants PiRho Investment Consulting, said: “Investors that have other calls on their money, such as from private equity or property, may look to rebalance hedge funds that have outperformed other risk assets.”
However, the decision by other hedge funds to impose restrictions may not benefit them over the longer term, and Marble Bar’s action may be vindicated. Commentators say the one in every four hedge funds that have barred clients from leaving will lose out in the long run, even if it seems they have won in the short term.
Van Steenis said those hedge funds that survive without bolting exits would engender greater trust among investors than those that did not let clients come and go freely.
He said: “We expect material redemptions and rotation from gated funds as gates are removed [and] in some cases we believe this will represent effectively all of the assets.”
He said permitting investors to leave would be a prerequisite for success, alongside offering liquidity, transparency, good risk management and being a partner with institutional investors.
Morten Spenner, chief executive at fund of hedge funds International Asset Management, said: “We have seen a decoupling [among hedge funds] between more liquid strategies including global macro, computer-driven, long/short equity and even long/short credit, which are returning to form, versus illiquid strategies such as arbitrage, which still finds bid/offer spreads very wide.”
The industry that emerges will be characterised by a greater concentration of assets in the large funds, according to van Steenis.
Europe’s largest 100 funds held about 58% of all the European industry’s money in 2006, he said, “and we expect [that to have] moved to more than 70% last year. Larger players will disproportionately benefit from a tendency towards a flight to quality in more turbulent markets. “Smaller hedge funds lack the scale, balance sheet, diversity and infrastructure in an environment with lower revenues to cover costs and increasing demands by investors for a more institutionalised product.”
However, Irvine said: “Size can be the enemy of outperforming the market, so I think that those hedge funds that are open need to think carefully about the appropriate size of their assets versus the opportunities they face and the diversification of their client base. For smaller funds to do well, they will need to ensure they are of institutional quality with regards to their back office, risk management and reporting.”
RAB Capital, GLG, Fortress and Och-Ziff all declined to comment.
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