Each business day HedgeCo.Net keeps you informed with the top hedge fund industry news, opinion and insight from around the globe. From the latest hedge fund launches, to the impact of regulation, competition, and investor activism - we track the topics and people that make a difference to you.
Reuters London – Hedge funds are starting to move back to the practice of marking complex structured credit instruments to their financial models because market prices are unreliable, says financial advisory firm Duff & Phelps.
James De Bono, managing director at Duff & Phelps, London, which helps hedge funds and banks value assets, told Reuters in an interview that funds are moving to marking to model because in illiquid markets the range of broker prices can be too wide to be very meaningful.
The valuation of hedge funds’ holdings has become an increasingly important issue as liquidity dries up for some assets markets while hedge funds themselves face redemption pressures.
Bloomberg – Permal Group temporarily blocked clients from taking money out of two hedge funds that invest with NWI Management LP while NWI changes its redemption rules, according to two people familiar with the matter.
The firm, based in London, froze the $700 million Permal Fixed Income Special Opportunities Ltd. and $350 million Permal Global Opportunities Ltd. funds, said the people, who asked not to be identified because the decision wasn’t publicly disclosed. Both Permal funds reinvest with NWI.
NWI, which oversees $2.8 billion, was hit with a surge in redemptions, the people said, in part because the New York-based firm allows investors to pull their cash each month. Most hedge funds limit withdrawals to every 90 days, and NWI is now changing its policy, the people said. Hari Hariharan, who runs NWI, declined to comment.
Reuters – Blue Mountain Capital Management LLC has temporarily halted redemptions at its largest hedge fund after clients asked to withdraw money despite its "distinguished" performance, according to a letter to its investors.
New York and London-based Blue Mountain said in the letter it had come up with a "redemption and recapitalization plan" to protect all its investors in the $3.1 billion Blue Mountain Credit Alternatives Fund.
The fund is down 2.4 percent year-to-date, the letter said, far less than the average fund which has lost 20 percent this year. Blue Mountain has a total of $5.5 billion assets under management.
The pressure on the credit fund came from some large fund-of-fund investors, "themselves facing liquidity pressures from their own investors," submitting significant redemption notices, the letter said.
"If we were to unwind or sell positions to meet current redemptions, the severe liquidation costs would be borne inequitably by the remaining investors," wrote CEO Andrew Feldstein in the letter, seen by Reuters.
He’s explaining how hedge fund investors — technically, limited partners — are only allowed to withdraw money on an quarterly or annual basis, which can result, when a fund is performing poorly, in a rush of redemptions that resembles a run on a bank.
To meet those redemption requests, a hedge fund leveraged 5 to 1 will have to sell at least $5 of investments to meet every $1 of redemptions. (And 5 to 1 is conservative; a hedge fund can, in theory, be almost infinitely leveraged.)
Telegraph.co.uk – 3i Infrastructure, which is 43pc owned by private equity group 3i, said it had exploited an "anomaly in the market" and added it was keen to take part in any purchase of Gatwick, after BAA was told it must sell two of its three London airports.
The fund has bought debt issued by Ireland’s Viridian, Thames Water and Telediffusion de France, adding that the purchases offered higher than equity returns at lower risk.
Michael Queen, a 3i managing partner, said: "Hedge funds are receiving redemption notices and having to liquidate their portfolios. Because capital is scarce at the moment, the prices at which they’re [selling] are clearly at a discount to fair value.
New York (HedgeCo.Net) – One month after RAB was forced to revamp their flagship fund, the British hedge fund is halting redemptions on their Energy Fund. After losing more than 50% of its value this year, RAB has informed investors that they will not be able to make withdraws in the near future.
Investors who wish to stay in the fund will be offered the same deal as those locked up in the $1.4 billion Special Situations Fund. The deal entails paying smaller management fees in exchange for keeping their money in the fund for the next three years.
Investors have until this Friday to let RAB know whether or not they want to accept the offer. The alternative would be receiving “redemption shares,” which are basically an IOU promised by RAB to pay back the investors when they start posting profits.
The Special Situations Fund, one of the largest shareholders of Northern Rock, got burned with the British Government nationalized the faltering bank. Losing almost $55 million in the first half of the year, former RAB head Phillip Richards wrote it off as “very regrettable” while outlining some new strategies for the company that involved investing in under-developed regions throughout India and the Middle East. Richards stepped down shortly after as CEO to concentrate exclusively on the Special Situations Fund.
The RAB Energy Fund is run by Gavin Wilson and Mark Redway and once managed over $1.5 billion at its peak.
Julie Scuderi Senior Editor for HedgeCo.Net Email: julie@hedgeco.net
Wall Street Journal Blogs – In an effort to forestall more redemptions and panic, hedge-fund managers preached “strong stomachs” and washed their hands of responsibility for losses in the latest round of investor letters.
A review of nearly a dozen investor letters sent by hedge funds around the beginning of October finds a tone that could, at best, be described as somber — and, at worst, dire. Oaktree Capital Management L.P.’s Howard Marks called the last couple of weeks “the greatest panic I’ve ever seen,” while Tontine Associates LLC’s Jeffrey Gendell said he was “embarrassed by this performance.”
All told, Chicago-based Hedge Fund Research Inc. said assets at hedge funds declined by $210 billion in the third quarter, the biggest quarterly decline ever, with investors redeeming $31 billion in the third quarter alone. That was the largest quarterly redemption in history.
At the same time, the main focus of these letters is to calm investors sufficiently enough so that they don’t start another round of redemptions later this year — or perhaps invest more money. And to accomplish that feat, many of the letters said investors’ lack of understanding of the markets and the whims of government leaders had hurt them, rather than their own misevaluation of the current environment.
Commodity Online – Steep performance losses and record investor capital redemptions reduced the size of the hedge fund industry by $210 billion in 3Q08. This represents the largest historical quarterly decline in assets, according to data released the other day by Hedge Fund Research, (HFR), a leading source of hedge fund information and performance data.
Analysis compiled using HFR Database shows investors withdrew over $31 billion in third quarter, the largest net capital redemption in the industry’s history. At the end of the third quarter, total industry capital stood at $1.72 trillion, down from $1.93 trillion at the end of second quarter..
The third quarter withdrawals entirely offset the capital inflows into hedge funds during the first half of the year, bringing year-to-date net capital flows to a decline of $2.5 billion. The decline in industry assets also exceeds the entire amount of investor capital inflow from 2007, which was a record $194 billion.
National Post – With strategy-wide net outflows of more than US$31-billion in the third quarter – the largest net capital redemption in the industry’s history – things aren’t looking too good for the hedge fund industry. Its size also fell by US$210-billion, the largest historic quarterly decline in assets, according to a recent report from Hedge Fund Research Inc.
“The current financial crisis presents many similarities to the financial crisis in 1998, certainly as it pertains to the hedge fund industry,” Kenneth Heinz, president of Hedge Fund Research said in a statement. “With losses continuing through October, it appears that 2008 will be the worst year on record for both hedge fund performance and industry asset flows.”
But the outflow figure is much better than the 20% or US$400-billion in redemptions some market commentators had feared, noted Citigroup analysts Haley Tam and Daniel Garrod. And the industry’s total capital still stood at US$1.72-trillion at the end of the quarter, according to the Hedge Fund Research’s base of more than 13,000 funds.
Tehran Times – Permal Investment Management, the hedge fund investment division of U.S. asset manager Legg Mason Inc, is aiming to raise up to $500 million to take advantage of a boom in distressed sales of hedge fund holdings, the Financial Times said.
Hedge funds investors have been selling their holdings at a discount to escape restrictions on withdrawals amid a global rush for cash, according to the paper.
The new fund has been ""designed to take advantage of investors’ need for liquidity,"" Omar Kodmani head of Permal’s London office, told the paper.
""There is an unusual number of sellers out there and those who are holding funds with a one-year lock-up or even a three-month wait to the next redemption window need to get out at a discount,"" Kodmani was quoted as saying.
istockAnalyst.com – September may in fact be the cruelest month of all, at least for hedge funds – now even worse than the previous "comeuppance month" just this last July. Popular funds, such as Greenlight Capital and Maverick Capital had especially difficult months, driving year-to-date losses beyond 15 percent and more.
Just recently many were asking the question: "Where are the big hedge fund failures?". At that time, many hedge funds, while down, were still doing better than the broader market. Some of the funds that were struggling were hoping to see recovery before waiting periods on redemption notices were finally met. Unfortunately, the September sell-off has only made it more likely that investors will go forward with their plans and begin pulling money out of funds.
Economic Times Mumbai – The concomitant impact of huge selling in European markets such as FTSE, CAC and DAX, falling more than 3 per cent, has seen a dip back home in realty, bank, IT and capital goods stocks.
Sectors like power, metal, pharma, auto and oil & gas saw a huge selling pressure and dropped more than 5 per cent, with an exception of realty, which was down more than 10 per cent.
Reports are doing rounds that US-based hedge funds are going for redemption within a span of 90 days and this announcement has pulled the market to a large extent.
