Hedge funds slam gate on investors
Industry’s downward spiral worsens in October as returns fall and redemptions rise
At least 10 hedge fund managers have put new restrictions on how much and when their investors can withdraw their capital, as the industry struggles to stem a wave of redemptions and poor performance.
The restrictions, made in recent weeks, cover hedge fund assets worth an estimated $21bn (€16.6bn), and come amid forecasts that assets under management will fall by as much as 25% this year and 30% of managers will shut their doors. At the same time, performance figures for the first part of October, obtained by Financial News, show many funds posted double-digit losses in just a few weeks.
Centaurus Capital and Polygon Investment Partners have put so-called “gates” in place, limiting what proportion of assets investors can withdraw at one redemption date. Gottex Fund Management, a fund of hedge funds manager, Wermuth Asset Management, Auriel and Atlantis Investment Management all suspended withdrawals in October until further notice. Atlantis, along with its peers, said it did this to ensure all investors were treated fairly and to protect the value of those still in the fund.
Others funds including RAB Capital, Ramius Capital, BlueBay Asset Management and Henderson Global Investors have all proposed favourable fees for investors for certain funds so investors will stick with them. The gates, vetoes and sweeteners have been instituted to slow or halt investors – who pulled a record $31bn from their funds last quarter – from doing the same on December 31, the next redemption window for most funds.
Hector Sants, chief executive of UK regulator the Financial Services Authority, weighed into the debate last week. He said managers should review their gating procedures “to avoid generating additional redemptions from otherwise satisfied investors taking steps to avoid being ‘at the back of the queue’.”
Morgan Stanley last week predicted that further outflows and losses of 18% so far this year would deplete the $1.9 trillion industry of up to $500bn of its assets by year’s end. Manny Roman, co-chief executive of GLG Partners, last week told a conference that he thought 30% of hedge funds would shut down as a result of this crisis.
A senior manager at a London-based credit hedge fund said these restrictions were only the start: “A lot more funds are going to gate their investors this year.”
Chris Jones, chief investment officer at fund of hedge funds Key Asset Management, said he had not seen as many restrictions put on redemptions since 2005, “but over the past quarter we have seen some of the worst liquidity ever. If you have an illiquid portfolio with distressed securities you should not be expected to be able to get your money back in a month. I am surprised not more funds have used gates or suspended redemptions.”
Jérôme de Lavenère Lussan, managing partner at investment management consultancy Laven Partners, said the “more famous hedge funds” were more likely to enact gates “because they have seen so much demand in the past they can impose conditions maybe others could not get away with.” Lussan expects to see more suspensions and gating, however restrictions were sometimes justified if investments could not be easily sold and forced disposals would disadvantage investors left in the fund.
Phil Irvine, co-founder of investment consultants PiRho Investment Consulting, said: “No investor likes being gated and traditionally any managers imposing a gate had negative consequences for their ability to raise future funds. However, the right to gate or for directors to impose restricted redemptions, is nearly always written into fund’s offering memorandum and everyone knows – or should know – what they are getting into. The most important thing is that all investors, both those remaining and those looking to disinvest, are treated in a fair manner and there is an orderly restructuring of the fund.”
Bruno de Pampelonne, chief executive of Tikehau, said the two-day suspension on its credit fund did not restrict investors, but that managers should consider investors wanting to remain invested when suspending redemptions. “In some cases suspensions and gates make sense to protect fund investors, because in some markets there is no liquidity and prices of assets have no real connection with their economic value.”
The restrictions come as many hedge funds continued to lose money in October after the industry’s worst month in September. Toscafund, whose manager Martin Hughes invests long and short in European equities, lost 8.0% this month to October 9, and is down 60.6% this year, investors said. The fund is restructuring to commit investors to staying in it for a fixed period, according to press reports.
RAB Capital’s $400m energy fund lost 19.8% in October’s first fortnight, said a source familiar with the fund, and it is down 56.6% this year after suffering from falling small-cap energy stocks and oil prices.
Many UK and Japan equity hedge funds also fell in early October as their markets tumbled. The FTSE 100 fell 20% up to October 10, and Japan’s Nikkei 225 fell 26%. Funds that fell with them included Henderson Group’s long/short UK equities fund, down 10.1% for the period, and Gartmore’s Alphagen Tenro Japan equities long/short fund, off 15.8%. Gartmore said that over the month’s first four working days Japan’s market “was caught in a panic unwind/redemption sell-down [and] on this occasion Tenro was on the wrong side of the unwind”, but added that the fund has made 14% annualised since launching in 2006.
Quantitative manager Renaissance Technologies saw its flagship Institutional Equities fund fall 8% this month to October 10 though it beat the 23% fall over the same period of the S&P 500, according to an investor.
Emerging markets hedge funds have also suffered. Sloane Robinson’s Phoenicia-Carthaginian fund, which has significant exposure to emerging markets, according to a source familiar with the fund, fell 12.2% in the first week of October, and is down 39.9% this year.
Toscafund, RAB Capital, Henderson, Renaissance Technologies, Gottex and Sloane Robinson declined to comment for this article.
Wermuth confirmed the suspension on Greater Europe fund which is down 26.9% this year and said it could not predict when it would resume valuations. Centaurus said its proposed restructuring would still allow some redemptions and favourable fees in return for investors committing their money.
Polygon, Whitebox Advisors and Ramius Capital declined to comment further. BlueBay Asset Management did not return calls by the time the article went to press.
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