Thursday, January 15, 2009

Hedge Fund Outflows Pick Up Pace

Outflows from hedge funds were nearly $150 billion for the month of December, bringing total redemptions for 2008 to $200 billion and total assets under management down to $1 trillion from nearly twice the size.  Despite hedge funds' best efforts to put up gates, set up sidebars, drawbridges, electrified fences, (insert your favorite euphemism for "You can't have your money back.  Try again next month.") some investors still managed to pull out cash from their formerly-favorite, high-flying, status-wielding managers.  They were the lucky ones.  The unlucky ones were those investors who placed their funds with GoldenTree Asset Management.  Although GoldenTree claims to only be down 30% for the year, they have received redemption requests totaling 25-30% of the fund, which apparently they cannot meet with cash.  The managers have opted to repay investors "in kind" (i.e. with whatever they have sitting around the office that may or may not be worth something, CDOs, ABS, CDO cubed, and maybe the office stapler if we can get an appropriate valuation.)  Needless to say, investors who will be receiving these "in kind" securities are none too pleased.  Frankly, if these securities are illiquid and can't be sold at the moment, how are investors to know that the amount of securities is actually worth what GoldenTree claims they are worth?  No doubt, the lawyers will be working overtime on this one.  
Perhaps even more embittered than GoldenTree's clients are those invested with Citigroup's Corporate Special Opportunities hedge fund.  Citi is returning 3 cents on the dollar to investors.  Believe it or not, this is actually a huge windfall for investors, as Citi bailed out the fund which would have had negative equity if it weren't for Citi's capital infusion.  CSO, according to the FT, managed almost $4.2 billion at its peak but wound up with a net asset value of about $58 million and debt of around $880 million in November.  December's results, no doubt, didn't offer any improvement and will likely just show up in the negative column in Citi's earnings results to be reported tomorrow morning.  Special Opportunities indeed! 
  

4 comments:

Senthil said...

The fact that the hedge fund becomes concerned about more and more redemption is unavoidable..the investors haven't got their due rights of knowing where their money are invested. especially when the investments are really huge some and didn't showed the returns expected. Transparency, Strict regulations are some of the things which we should act on to see the hedge fund industry cross this hurdle.

Hedge Fund Lawyer said...

It is also unfortunate that some funds have to lock investors in or place gates on redemptions. It is likely that those managers who are starting a hedge fund in the new year will need to modify these terms so that they are more investor friendly. This will be done through blanket changes or through individual investor side-letters.

Sachin said...

Dec 2008 is more or less the bottom and from Jan 2009 onwards it should all be up and up. If the hedge funds always stick to the basic common sense approach of not becoming too greedy and leveraged, I think they would prove to be the catalyst for the much awaited recovery.

Mr Wrightwood said...

@ Sachin: 2 and 20 is the definition of greedy when you blowout on the first downtick. 2 and 20 for what? Being long? I can buy some SPYs on ETrade and get the same P&L as the hedgefund monkeys gave us. Where's the value-add there?