Hedge funds hit by fresh wave of withdrawals

By James Mackintosh

Financial Times. November 29 2008 01:03

Hedge funds have been hit by a fresh wave of withdrawals as investors search for cash, prompting more funds to impose emergency measures to block repayments.

London Diversified Fund Management, one of Britain’s best-known fixed- income managers, on Friday suspended both its hedge funds as trading conditions in the derivatives markets created valuation difficulties ahead of redemptions.

LDFM, founded by former JPMorgan bankers David Gorton and Rob Standing, manages close to $3bn (£1.9bn), down from a peak of $8bn after its main fund fell 23 per cent this year and investors pulled out. LDFM is joining a roster of hundreds of hedge funds in restricting withdrawals, with investors and prime brokers estimating as many as a fifth have suspended or limited what investors can get back as they have their worst year on record.

This week CQS, a London convertible bond specialist run by former Credit Suisse banker Michael Hintze, began canvassing investors on whether it should change the terms of its main fund to allow it to restrict withdrawals if markets worsen next year.

Morgan Stanley said there has been a sharp rise in redemption requests by hedge fund investors as the year-end repayment date approaches. The bank, the biggest prime broker, estimates year-end redemptions for funds that require 45 days’ notice for withdrawals of money, are running at 18 per cent, against 9 per cent for funds which required 90 days’ notice.

Huw van Steenis, analyst at Morgan Stanley, said industry assets could shrink 35-45 per cent from June’s $1,930bn by the first quarter of next year, as heavy redemptions added to the pain of poor performance.

On his “bear” scenario, the industry could plunge to $900bn by the end of next year. He said European and Asian hedge funds were being hit hardest, with 25-30 per cent withdrawals in the second half of this year, against 15-20 per cent in the US.

“We think redemptions in the States will play catch-me-up in the first quarter [of 2009],” he said.

Some funds of hedge funds are being hit hard as the hedge funds in which they invest restrict withdrawals.

Two Bank of New York Mellon funds of hedge funds told investors this week they planned to restructure because almost a third of the funds in which they invest had limited redemptions. The Sanctuary I and II funds will split into continuing and wind-down classes, with pay-outs of about a third of the wind-down class expected early next year.

On Friday, London’s $4.3bn Atlas Capital, owned by New York-based Sciens Capital Management, suspended withdrawals from a dozen funds of hedge funds, while Crédit Agricole and Grenfell PAI each suspended a fund of funds as underlying hedge funds restricted withdrawals.

“We have seen really accelerating redemptions around the 30 per cent level,” said Derek Stewart, a director of Mellon Global Alternative Investments, which manages the Sanctuary I and II funds. “The reason for doing this [restructuring] is purely to protect the interest of investors.”

 

The suspension comes amid a rush for cash by investors, which has seen even funds with the strongest pedigree and solid performance hit by heavy withdrawals, while scores restricted redemptions. The combination of the worst year on record for hedge fund returns and the biggest withdrawals on record mean the industry’s assets will shrink 35-45 per cent from June to the end of December, according to analysis by Morgan Stanley.

The Tudor BVI fund is down only 5 per cent to the end of November, far ahead of the average 16 per cent drop of Hedge Fund Research’s HFRI index.

“I recognise that a restructuring is an unwelcome, but I believe necessary, step against the backdrop of Tudor BVI’s 22-year history of unbroken profitable years,” Mr Jones wrote. “I believe it is but a brief step, however, on the road to important long-term changes for the benefit of all investors.”

Tudor is already in the process of splitting out the Raptor long/short equity fund, run by James Pallotta from Boston, which has been hit by heavy withdrawals. Raptor was down 16 per cent to the end of October, according to one investor.

Illiquid assets will be split from the BVI fund into a new Legacy fund, holding the fund’s $3.1bn of corporate credits in eastern Europe, Asia and Latin America, plus private equity and hedge fund investments.

Mr Jones said withdrawals were likely to be allowed again at the end of March, after toxic assets had been split out. The main fund will return to Mr Jones’s trading roots in highly liquid global macro, freewheeling bets on interest rates, stock market indices, commodities and currencies, which have done well this year. Systematic macro traders are doing particularly well. Tudor’s $1bn Tensor fund is up 34 per cent, while the $400m Tudor Futures managed futures fund is up 24 per cent.

Tudor Jones suspends withdrawals from flagship fund

By James Mackintosh

Financial Times. December 1 2008 21:12

Paul Tudor Jones, who shot to fame and made a fortune when he predicted the 1987 stock market crash, plans to split toxic assets out of his $10bn flagship hedge fund and has suspended redemptions until the restructuring is complete.

In a letter sent to clients on Friday, Mr Jones, who is based in Greenwich, Connecticut, said investors were trying to redeem 14 per cent of the Tudor BVI fund at the end of the year. This would have left the remaining investors holding too large a proportion of illiquid assets, particularly corporate credit in emerging markets, the letter said.

The suspension comes amid a rush for cash by investors, which has seen even funds with the strongest pedigree and solid performance hit by heavy withdrawals, while scores restricted redemptions. The combination of the worst year on record for hedge fund returns and the biggest withdrawals on record mean the industry’s assets will shrink 35-45 per cent from June to the end of December, according to analysis by Morgan Stanley.

The Tudor BVI fund is down only 5 per cent to the end of November, far ahead of the average 16 per cent drop of Hedge Fund Research’s HFRI index.

“I recognise that a restructuring is an unwelcome, but I believe necessary, step against the backdrop of Tudor BVI’s 22-year history of unbroken profitable years,” Mr Jones wrote. “I believe it is but a brief step, however, on the road to important long-term changes for the benefit of all investors.”

Tudor is already in the process of splitting out the Raptor long/short equity fund, run by James Pallotta from Boston, which has been hit by heavy withdrawals. Raptor was down 16 per cent to the end of October, according to one investor.

Illiquid assets will be split from the BVI fund into a new Legacy fund, holding the fund’s $3.1bn of corporate credits in eastern Europe, Asia and Latin America, plus private equity and hedge fund investments.

Mr Jones said withdrawals were likely to be allowed again at the end of March, after toxic assets had been split out. The main fund will return to Mr Jones’s trading roots in highly liquid global macro, freewheeling bets on interest rates, stock market indices, commodities and currencies, which have done well this year. Systematic macro traders are doing particularly well. Tudor’s $1bn Tensor fund is up 34 per cent, while the $400m Tudor Futures managed futures fund is up 24 per cent.

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