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Hedge Funds Will Be Ruined by Withdrawal Limits:

Bloomberg – Looking for a new definition of a hedge fund? How about an organization that takes 20 percent of the profits on your money in the good times, then refuses to let you have it back when the weather turns rough?

We all know the hedge-fund industry had a terrible 2008. With a few honorable exceptions, its promises of being able to deliver steady, positive returns in either a rising or falling market turned out to be empty.

Yet, in many cases, the industry has taken a bad situation and made it worse. Many funds have placed limits on withdrawals that investors can make. In effect, people are locked into a falling asset.

That is a big mistake. In any investment business, the return of capital is far more important than the return on capital. By forcing investors to keep their money tied up during a bad year, the hedge funds are damaging their own reputation, and it may well never recover.

There are numerous examples of funds limiting withdrawals.

Citadel Investment Group LLC said last month it was stopping year-end withdrawals from its two biggest funds after investors sought to take out $1.2 billion, or 12 percent of assets.

Magnetar Capital LLC took similar action after its largest fund lost 30 percent of its value in the year through November.

Cerberus Capital Management LP last month limited redemptions from a hedge fund that lost 16 percent of its value.

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