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Bloomberg - The global hedge-fund industry lost $64 billion of assets in November, with an index tracking its performance declining for a sixth month as economies in Asia and Europe joined the U.S. in recession, Eurekahedge Pte said.
“It’s very clear that there is going to be significant consolidation in the hedge-fund industry,” said Duncan Smith, a partner in Hong Kong at Ogier, a firm that provides corporate and legal services to financial companies. “Conditions are quite difficult and that really goes without saying. Underlying liquidity is very hard for funds.”
Market declines contributed to $18 billion in net losses, while investor redemptions made up $46 billion, Singapore-based Eurekahedge said, based on preliminary figures taken from 41 percent of the funds it surveys. It said hedge-fund assets shrank by $110 billion to $1.65 trillion in October.
Welcome, I’m Steve Forbes. It’s a pleasure and privilege to introduce you to our featured guest, Cantor Fitzgerald CEO Howard Lutnick. He’ll tell us why October was his company’s best month ever.
But first…This ongoing financial crisis is driven by fear, not by a lack of cash or liquidity in the global markets. There is no reason why our economy can’t get back on track by springtime. But how do we get there form here? One answer is that we simply let financial markets work.
The economy still has very real strengths, and we know how smart, pro-growth policies work. We also already know what doesn’t work. Tax and spending does not work. One-time stimulus checks have no lasting effect. But if we actually lowered tax rates, including corporate tax rates, we’d see real stimulus.
Even Detroit could self-repair, if we let it. Right now they make money everywhere but North America. Why? Because they aren’t allowed to count the thrifty cars made overseas toward their efficiency standards. This makes no sense. Also, consider how the economy would roar ahead if we got rid of the government’s crazy mark-to-market accounting rule and had a sensible monetary policy and a strong dollar. Because if the dollar isn’t right, the world isn’t right economically. That’s the bottom line.
New York (HedgeCo.Net) – Citigroup Inc. will be liquidating its Corporate Special Opportunities fund after losing over half its value last month, according to a report by the Financial Times.
The hedge fund had frozen redemptions for almost a year before deciding to shut it down. Many funds freeze redemptions in hopes that market conditions will improve and to prevent a liquidity crunch that may just be fueled by fear.
According to the report, Citigroup infused the hedge fund with $450 million in credit and about $320 million in equity. In its heyday, the fund managed about $4.2 billion.
October was a rough month for hedge funds as a whole, with the average fund down almost 5.5 percent according to data from Hedge Fund Research. With only two months to go, 2008 looks to be the worst year ever recorded by hedge funds, with the average fund down almost 15.5 percent.
Julie Scuderi Senior Editor for HedgeCo.Net Email: julie@hedgeco.net
As hedge fund titans face an intense grilling by congressional committees and thousands of hedge funds around the world close their doors, perhaps it is time to consider a new approach.
A hedge fund structure offers investors many advantages such as maximum flexibility, but the model is sure to change under all the heightened scrutiny.
After specializing in country-specific exchange-traded funds since 2002, I am convinced that there would be strong demand funds with new structures that address some of the current drawbacks of hedge funds, namely liquidity, transparency, leverage, risk management and fees.
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.
New York (HedgeCo.Net) – Following in the footsteps of other large hedge funds trying to weather the credit crunch, Blue Mountain Capital Management has suspended withdraws on its $3.1 billion fund.
The Blue Mountain Credit Alternatives Fund lost a little over 2 percent in October, while posting admirable returns the rest of the year. The firm decided to halt redemptions hoping they won’t have to sell assets in the current falling credit markets.
“We are not comfortable with this state of affairs,” Feldstein wrote in a letter to investors obtained by Bloomberg News. “If we were to unwind or sell positions to meet current redemptions, the severe liquidation costs would be borne inequitably by the remaining investors.”
The move comes as a shock to some, since the Credit Alternatives Fund has posted an average return of over 45 percent since its inception in 2003. The firm’s other funds aren’t faring too bad either, with its $1.1 billion equity alternatives fund losing only 0.9 percent and its $400 million BlueCorr Fund boasting returns of 21.3 percent, according to the letter. Hedge funds as a whole have had their worst year ever, losing 20 percent according to the Chicago-based HFRX Global Index.
Investors were given until November 10 to decide whether they wanted to redeem their current investment or exchange it for any one or more of three share classes. If they choose to stay, the lock up provisions of the fund will be waived.
For an industry that was once thought to manage close to $3 trillion in the beginning of 2008, assets are falling off sharply according to an estimate by Morgan Stanley, who says that number might drop to $1.3 trillion.
Fears of liquidity crunches have forced investors to rush to redeem their cash, causing several notable funds to freeze up capital this year. Last week, Deephaven Capital Management froze their $1.6 billion fund after investors rushed to withdraw 30 percent of their capital. Meanwhile, RAB took a more drastic route, opting for a three year lock-up in their Special Situations Fund after losing half of its value this year.
“This level of redemptions in the current market environment forces the question of whether such redemptions can be processed in the ordinary course without disadvantaging both continuing and later redeeming investors,” explained Deephaven CEO Colin Smith in his letter to investors.
It is unclear how long Blue Mountain Capital plans on restricting access to redemptions. The company manages an estimated $5.5 billion from locations in New York and London.
Julie Scuderi Senior Editor for HedgeCo.Net Email: julie@hedgeco.net
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.
West Palm Beach (HedgeCo.net) – In a letter to investors, Hedge Fund manager Pentwater Capital announced that due to a number of unexpected redemption notices for year-end they have suspended redemptions and withdrawals, effective immediately.
"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," says the Pentwater letter, "In turn, this has put additional pressure on hedge fund investors to find liquidity wherever they can, because they have to fund their own potential redemptions."
"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 fund has instead opted to create two new classes that have modified liquidity, fee and expense provisions as compared with the current classes. Investors will have the choice to transfer all or part of their investment into one or both of the new classes or remain in the existing classes.
"We will allow investors that wish to invest new capital to do so in one of these new classes and until further notice allow them to retain the benefit of their existing high water mark on any new investment. Further, investors that have already submitted a redemption notice will have a one-time option to rescind that notice, reduce the size of their redemption request, and/or choose to participate in one of our new classes."
Pentwater was not immediately available for comment.
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Times of Malta – The situation in the international financial markets, although still displaying signs of uncertainty, seems to be settling down. Governments in the major economies, US, UK, Germany, France and Italy, no longer seem to be chasing fairies (or bad witches!), but appear to have got ahead of the situation.
The money markets (which were a major issue) are getting unblocked and as such even interbank lending rates are going down. However, this does not mean that the world has solved all its economic problems. We have simply gone back to the situation of a few months ago, when there was already fear of an international economic slowdown resulting from the increases in the price of oil and the consequent rise in inflation.
The recapitalisation of financial institutions by different governments, the partial or full re-nationalisation of such institutions and the continued provision of liquidity by governments to the financial system have restored a level of confidence that at last allows the system to function, even if not at an optimum, at least to an acceptable level.
Reuters – A U.S.-based trade group for hedge funds has urged the Bank of England to step in and speed up the freeing up of assets frozen in the collapse of Lehman Brothers Holdings Inc, saying it has become "an issue of very substantial systemic significance."
Richard Baker, a former U.S. congressman who heads the Managed Funds Association (MFA), said the lock-up of Lehman assets threatens British prime brokerage businesses and "will exacerbate systemic risks if not handled properly."
He made the plea in a letter dated Oct. 13, sent to the British central bank’s governor on the eve of a meeting between the administrators of Lehman Brothers International (Europe) (LBIE) and UK regulators.
Baker also said the current process is adding more uncertainty to global markets and that expediting the return of assets will give the market "a much needed boost of liquidity and confidence."
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.
Forbes – Lobbyists for the $2 trillion hedge fund industry made a last ditch effort Wednesday to convince U.S. securities regulators to let an emergency order prohibiting short selling in more than 950 financial firms expire Thursday.
"The orders have not prevented price declines of financial institutions, volatility in the securities of these firms, or the failure of a financial institution," said Richard Baker, president of hedge fund lobby group Managed Funds Association.
Baker said the emergency orders have increased volatility, reduced liquidity and abruptly halted capital-raising, including through the issuance of convertible securities.
But a number of securities law experts expect the Securities and Exchange Commission to extend the ban beyond Thursday because of the current fragile state of the markets.
Under the SEC emergency measures, short selling in the U.S.-listed financial firms stocks has been prohibited for about two weeks.
