Hedge funds complain about lenders getting stingy

Date: Wednesday, March 12, 2008
Author: Svea Herbst-Bayliss, Reuters.com

BOSTON, March 11 (Reuters) - U.S. hedge fund managers Ron Beller and Geoffrey Grant whose two funds recently collapsed blamed bankers for some of their troubles.

Lenders, who once helped the pair finance new investments, now wanted the money or assets back, Beller and Grant told investors last month, adding that tighter terms "compounded our difficulties and made it impossible to meet margin calls."

Beller and Grant are not alone in complaining that many of Wall Street's biggest banks' prime brokerage units are now retreating and years in which they lead the charge of supplying money and clients to hedge funds.

"Some of the street's biggest lenders started to pull in their credit lines very quickly. It has been a selective but noticeable process and that is because the banks themselves are in trouble," said one manager at a large New York-based firm, who asked to remain anonymous in order to speak candidly.

This week, Carlyle Capital Corp, a unit of private equity and hedge fund group Carlyle Group, asked its lenders for a standstill agreement after being hit with $400 million in margin calls.

Prime brokers' newly cool treatment of some hedge funds signals a sudden shift in attitude after many of these bankers aggressively courted hedge fund business because strong fund returns generally earned prime brokers hefty fees as well.

Prime brokers routinely lent hedge funds money letting them use the borrowed funds, or leverage, to make bigger bets.

But now as the housing crisis appears to be deepening and some U.S. economists are forecasting a recession, lenders are quickly becoming more risk averse. On top of that, some of Wall Street's most prominent banks, including Merrill Lynch (MER.N: Quote, Profile, Research) and Citigroup (C.N: Quote, Profile, Research), have already written off billions of dollars after their own bets on subprime mortgages soured.

"It is much harder to get any financing these days," said Mike Hennessy, who selects hedge funds at Morgan Creek Capital, adding "we are hearing this from all of our managers."

Executives at several prime brokerages have said there is no widespread crackdown and that their business continues to flourish.

While prime brokers began shying away from risk as early as last summer, lenders' nervousness became even more pronounced in recent weeks as mortgage-backed bonds lost more ground, managers and investors said.

Hedge funds that specialize in credit strategies and are nursing losses this year, have been among the first to feel the pressure.

"There are several managers claiming that prime brokers have been overly aggressive in requiring an upgrade in margin collateral," said Charles Gradante, who helps clients choose hedge funds as a principal in Hennessee Group. "Managers who are down around 5 percent are getting the calls," he added.

Hedge funds have had a terrible start to the year, with the average fund losing 3.6 percent in January. While February was better for many, the average fund is still down 1.43 percent in the first two months of the year, according to data from the Hennessee Group.

What is making the matter particularly painful for hedge fund managers is that increased pressure from lenders is making many sell off top rated securities.

"This is forcing some people to liquidate a lot of things they should not be selling and that could force more funds into collapse," the New York-based hedge fund manager said. (Reporting by Svea Herbst-Bayliss, editing by Leslie Gevirtz)