Stigma of redemption gates fading fast
Nov 3rd, 2008 | Filed under: Media Coverage of Hedge Funds, Today's PostApparently, the stigma associated with closing redemption gates is quickly disappearing. As Thomson reports,
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.”
Wealth Bulletin cites 6 hedge fund managers that have suspended redemptions and several that have offered “sweeteners” for investors to stick around. The list of new gates includes: Centaurus Capital, Polygon Investment Partners (old news), Gottex Fund Management, Wermuth Asset Management, Auriel, and Atlantis Investment Management. According to the publication, favorable fee sweeteners have been offered in exchange for locking-in capital at: RAB Capital, Ramius Capital, BlueBay Asset Management and Henderson Global Investors.
The Times reports on an interesting twist. RAB Capital, says the paper, is offering a form of IOU to investors that promises to pay them out as soon as the firm can sell the requisite securities (not, we assume, at some later redemption date).
The ground isn’t the only thing being frozen in Minnesota this fall. Investment News reports that Deephaven, the $1.6 billion multi-strategy fund, froze redemptions when 30% of investors asked for their money back. Apparently the fund was up 16% per year for 10+ years, then hit the skids with a -25% YTD by the end of October.
Meanwhile in Australia, long-only funds have also closed their redemption gates. According to Bloomberg, Perpetual Ltd. has suspended redemptions from its income and mortgage funds while Everest Babcock & Brown has suspended redemptions from its own income fund.
A letter from Pentwater Capital to its investors gives some insight into how redemptions affect fund management. HedgeCo.net reports that the firm recently created two different liquidity/fee classes and told investors: “The entire hedge fund industry is bracing for large redemptions at year-end so as not to become forced sellers in the midst of a severe market crisis…If the Fund were to meet the year-end redemption requests we have received, the Fund would be forced to sell more of its investments into one of the worst markets since the great depression.”
The Wall Street Journal estimates that the recently imposed gates govern around $20 billion, although it’s not clear what it defines as “recently”.
Although the notice period required to redeem from a hedge fund can range from 30 days to 90 days, Reuters reports that November 15th (45 days before year end) is “D-Day” for the hedge fund industry. Problem is, the more this is reported, the more investors are likely to want to redeem. Reuters cites experts who say funds of funds are redeeming 15-20% from their underlying managers just in case.
One manager warns that the rush for the exits creates a self-fulfilling prophecy. David Thompson of Collingham Capital told a conference audience in London recently that:
“One of the problems has been that investors have been getting out too quickly. You don’t want to be in the situation where you invest in something where a lot of people want to get out at the end of this month, the end of this year, or on a daily basis.”
Even regulators are weighing in on the issue of preemptive redemptions. The head of the UK’s Financial Services Authority told the same conference audience about one reason why he thinks hedge fund investors were stampeding to the exits:
“…gate structures that may have been established several years ago may need to be reviewed in order to avoid generating additional redemptions from otherwise satisfied investors taking steps to avoid being ‘at the back of the queue’.”
Key lesson: When someone yells “fire!”, rush out of the building first …Figure out if it was a hoax later…
Late Breaking Addendum: According to Thomson, the $3 billion Blue Mountain Credit Alternatives Fund closed the redemption gate recently even though YTD returns were only -2.4%. The problem according to company management? Fund of funds redemptions.
Why would anyone join a hedge fund when so many limitations are placed on your money. Freezing the gates should be illegal. What’s next…banks preventing you from making withdrawals - oh wait…they do that as well during crisis.
I understand your anger with some banks, “me”. But banks have always locked in your investment via CDs and other term deposits. They do this so they can turn around and lend the money out to homeowners, businesses and consumers. Hedge funds essentially use a hybrid of a term deposit and demand deposit. By dynamically switching from demand to term, the fund essentially prevents a run on the bank. We actually think it should be illegal to offer investors a level of liquidity (e.g. 100% liquidity for everyone, no matter the circumstance) that is incongruent with the liquidity of the underlying assets.
Well, if hedge funds don’t shut the gates, their liquidation could possibly drive prices down enough to trip circuit breakers, causing the entire market to shut down for a while. As for why anyone would want to put their money in with a fund that closes the gates, well, because the fund (until this year) has made them lots of money, probably.
Perhaps liquidity expectation is the problem here. The equity, commodity and bond markets are so fixated on being able to sell and buy at a moments notice that we forget what investing was supposed to be about. Real estate and true business ownership was supposed to be a long term hold, not a week-to-week or month-to-month speculation.
I used to joke that the stock market should be open for one day per month. Then only the real investors would participate and the stock-jockey’s could ply their trade in Vegas instead of impacting the rest of us so badly.
Oh, and leveraging might have something to do with it…
Perhaps we should also go back to the old taxation regime where your investment only gets capital gains treatment if held for at least one year, otherwise its all income…
Mentor Capital, Inc. has a $145 Million program to assist hedge fund principals in managing their gated redemptions without having to liquidate positions.