Friday, November 21, 2008
More Hedge Funds Expected to Succumb
This has been the toughest year on record for hedge funds. Several factors suggest it could get even worse. In recent weeks, many hedge funds have been stockpiling cash in the hopes of stanching losses and having the wherewithal to satisfy investor redemptions. Some hedge-fund managers had hoped investors might reverse their withdrawal requests if the market improved. But amid the past week's rout (even with Friday's gain), and a steady redemptions drumbeat from pension funds, endowments and others, there is a sense that more hedge funds will have to close. 'Survival Mode' "A lot of hedge funds are in survival mode trying to ride the year out," says Jack McDonald, president and chief executive of Conifer Securities LLC, which does trading and accounting for hedge funds. Redemptions in the industry will amount to between 25% and 40% of hedge-fund assets by March 2009, says Barry Colvin, vice chairman of Balyasny Asset Management, a New York hedge fund. The market continues to pummel many funds' performance, including some that outperformed peers in recent years. One of them, Glenview Capital Management, the $5 billion equities-focused hedge-fund firm overseen by Lawrence Robbins, is down about 50% this year in its biggest fund, according to investors. Redemptions and investment declines will likely cause hedge-fund assets to fall as much as 50% from their peak by mid-2009, Citigroup Inc. said in a Nov. 16 research report. Meanwhile, funds are scrambling to figure out how to satisfy investors' demands for cash. Some have curtailed their selling of securities in recent days even amid a torrent of withdrawal requests. Instead, a number of firms, including Platinum Grove Asset Management, Blue Mountain Capital and Whitebox Advisors, are limiting investor withdrawals or restructuring to avoid forced asset sales. Some, like Trafelet & Co. and Plainfield Asset Management, are placing investments into separate funds, sometimes called "special purpose vehicles," that will sell the assets over time, to avoid dumping securities in a rough market, according to investors. Lawyers say more firms are working on similar moves. The biggest funds run by Farallon Capital Management are down about 30% this year, and a higher-than-normal level of redemptions has prompted discussions about whether the San Francisco firm will curb withdrawals, which have reached into the billions of dollars this year. A spokesman declined to comment. Earlier this month, large London hedge fund GLG Partners LP told investors it is suspending withdrawals from its Market Neutral fund, which invests in convertible bonds and had about $1.5 billion at the end of September. Convertible bonds and bank loans have been among the biggest money-losing assets for hedge funds in recent weeks. "I don't think people are selling their less-liquid holdings to meet redemptions, they're just telling investors they can't have that portion of their money or that it's in a liquidating class," says Brett Barth, who helps run BBR Partners, a firm that manages money for wealthy families. One large force sucking hedge money are the "fund-of-fund" firms, which spread their clients' money across pools of hedge funds and account for about 40% of hedge-fund assets. Some such managers are now blocking withdrawals out of their firms. Switzerland's Gottex Fund Management Holdings AG, for instance, recently said it is barring clients from cashing out from some funds for several months. Hope Coming? The woes have dimmed hopes that hedge-fund cash could fuel a year-end market upturn. Still, a late-year hedge-fund driven rally can't be ruled out, Citigroup said, given the declines in stock prices. "While hedge funds are not in a great position to put money to work at this juncture," the firm said, "they most likely would try to participate to limit annual losses and possibly retain other investors who are on the fence about reallocating capital."