After a much publicized debate on their troubled hedge funds, Drake Management has decided to shut down its $2.5 billion Global Opportunities Fund (summer of 2008).
Drake had suspended redemptions in December of 2007, after the fund lost 25% of its value and investors rushed to withdraw money. Investors were denied the action of “liquidating investments in a market characterized by unprecedented illiquidity.” After experiencing sharp declines due to the subprime mortgage crisis, management was pondering the decision of shutting down due to “sharply negative performance and the extreme volatility and illiquidity of certain capital markets.”
The Global Opportunities Fund was launched in 2002 by the firms founder, Anthony Faillace and Steve Luttrell. In it’s heyday, the fund was posting returns of 13.4% a year on average.
So what fueled the collapse of this once-thriving hedge fund that oversaw over $4 billion in assets? Like many other hedge funds in 2007, the Global Opportunities Fund was hit hard by the subprime mortgage crisis and the credit crunch that followed. Drake, like these other funds, used heavy amounts of leverage as part of their strategy to buy bonds backed by subprime mortgages. When homeowners started to default on their mortgages at a catastrophic rate, these bonds started to plummet in value. Their lack of ample liquidity to begin with made the situation even harder to get out of. Brokerage firms then started to demand more cash or collateral to back their loans to hedge funds. On top of that, investors rush to withdraw money when there is a rumor of a liquidity crunch. All of these factors contributed to the collapse of the fund.
“Under normal market conditions, these divergent interests could both be met by exiting positions and generating the necessary proceeds to redeem investors,” Drake said. “But present market conditions have effectively prevented us from following this course of action.”
Drake plans to start a hedge fund later this year (2008), and investors who choose to transfer their capital to the new fund will not pay performance fees until their losses are recouped. The liquidation is expected to be complete by early 2009 and investors will likely get most of their money back, the letter stated.
Drake’s struggle comes at a time when many hedge funds that manage large amounts of assets are being forced to liquidate. Just this month, London based Peloton Partners closed their two hedge funds that once managed $3 billion after their lenders pulled back on credit.
Drake, a New-York based company run by former BlackRock Inc. employees, also manages two other hedge funds, the $1.3 billion Absolute Return Fund which declined over 14% last year, and the $160 million Drake Low Volatility Fund.