Hedge Funds Gird for Withdrawals

As Redemption Requests Roll In, Principals Scramble to Soothe Anxieties Hedge funds, frequently at the mercy of antsy investors, are bracing for a wave of withdrawals at the end of the month. HBK Investments LP, which peaked last year with more than $14 billion in assets, is finding its doorstep awfully crowded with clients asking for their money back. Already, investors have sought to withdraw more than 30% of their capital this year, according to people familiar with the figures. Firm-wide assets have shrunk to $11.5 billion. HBK declined to comment. When it comes to withdrawals, HBK isn't alone. "Investors speak to each other. Many will feel that if they might want to pull money, it's best to get in line in case there's a rush to the exits," said Jeff Vale, principal of Infinity Capital Partners in Atlanta, which invests clients' money in hedge funds and isn't an HBK client. "June 30 is going to be interesting. The biggest risk out there is liquidity." Dallas-based HBK, known for its traditionally steady, conservative investment style, tends to fly below the radar despite its size. Investing in everything from private equity and sovereign debt to stocks and convertible bonds, HBK produced 15% annualized returns over 16 years. That was before last year, when it misjudged the subprime market and finished barely positive, returning less than 1% in its Master Fund. It was the closest HBK has ever come to a negative year, so naturally clients were looking for stability in 2008. The Master Fund ended the first quarter roughly flat -- respectable compared with the markets and losses at hedge funds on average. Against that backdrop, HBK wasn't the most obvious candidate for a stampede. But, these days, investors don't need a gut-wrenching loss to prompt them to pull their cash, and redemption requests have been piling up, reaching levels the firm hasn't seen in a decade. Investors have been cautious about putting money with many established hedge funds this year, too. Some instead have committed to new credit funds set up to buy mortgages and other distressed assets. As those funds make capital calls, investors have to send in their cash -- another factor in the redemption trend, hedge-fund managers say. Redemptions throughout the hedge-fund community could have ripple effects in the markets in coming weeks as managers raise cash by selling investments common to many portfolios. The selling could add to tumult in financial stocks, long a favorite of hedge funds. Those shares have been extremely volatile lately. At HBK, its principals have been trying to soothe worries, saying that the firm's subprime woes are over and that it is poised to make money. Furthermore, HBK has a limited need to sell investments quickly since it only allows withdrawals of as much as 10% of assets in any quarter. That percentage, or "gate," is lower than the 15% or 20% at many hedge funds. And it gives some investors an incentive to inflate their redemption requests because if the gate goes up, as HBK's has twice this year, clients get back a proportion based on what they asked for. Such gaming of the gate can distort the redemption picture. There are other ways that redemption numbers don't tell the whole story. At Farallon Capital Management in San Francisco, the Offshore Investors Fund slid 10% last quarter before regaining about a third of that, according to investors. Still, the fund -- which has returned 13% annually since its inception -- could face $1.4 billion or more in withdrawals this year through June, shrinking below its $8 billion size after starting the year with more than $10 billion. But part of that shrinkage is intended. Some investors have been turned away and others have chosen to transfer money to other Farallon funds, which have had smaller losses this year, a greater concentration in long-term investments and stricter lock-ups for clients. The change fits Farallon's strategy of putting more capital into less-liquid holdings, especially now with credit-market opportunities plentiful. A spokeswoman declined to comment. Some of this year's redemption edginess is especially pronounced at funds of hedge funds, which raise money from pension funds and wealthy individuals and select hedge funds for them. Many funds of hedge funds let their investors withdraw money monthly. So, when fund-of-funds managers get more redemption requests than they expect, they have to find cash somewhere. Often that means redeeming from hedge funds with the loosest withdrawal terms.