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Millions held in hedge funds lockdown

Date: Thursday, October 2, 2008
Author: James Mackintosh, FT.com

An increasing number of hedge funds are telling customers they cannot have their money back as rising withdrawals and exposure to Lehman Brothers hit the industry.

In the past week, Amber Capital, the $3.2bn New York fund, Guy Wyser-Pratte’s $500m activist fund, a $400m fund run by London’s Cheyne Capital, and a slew of smaller funds have blocked redemptions temporarily.

The inability to access money has already had a knock-on effect: Absolute Return Partners’ Millennium Wave, a small fund of hedge funds, has had to tell its customers they cannot have their money back until it can retrieve it from the funds in which it invests.

Luqman Arnold’s Olivant is also struggling to access its shares in UBS, which are stuck at Lehman’s London arm, meaning it will not be able to vote them until they are returned by Lehman administrators.

This week was the final date for clients to put in re-demption requests for many funds in order to get their money back by the end of the year, and the industry is worried about the scale of withdrawals.

In particular, funds of hedge funds servicing wealthy individuals have been bombarded with re-quests for billions of dollars of withdrawals.

“It is really ugly out there,” said one large London hedge fund manager.

The failure of Lehman, prime broker to many funds, looking after their assets and providing leverage, compounded the problems facing the industry, already having its worst year on record.

Amber told clients it was suspending withdrawals because it could not calculate the value of assets at Lehman’s London arm, where administrators say it could take months to return even assets held in accounts safe from bankruptcy.

“Our assets are frozen at the moment,” said Gulf International Bank of its $35m Falcon Relative Value fund, which used Lehman as a prime broker.

Amber, which had several hundred million dollars of assets at Lehman, is in the same situation. MKM Longboat, which decided last week to wind up its $1.5bn flagship fund, told investors that part of the reason was its Lehman exposure, al-though it has also had big redemption requests.

Others with less significant exposure to Lehman, including GLG Partners, CQS and Augustus, continue to allow withdrawals.

The scale of investor withdrawals from hedge funds remains unclear, and big institutions seem happy to keep their holdings, say prime brokers, managers and investors.

But if the wave of redemptions by wealthy individuals proves accurate, it could force many managers who relied on them into firesales of assets, potentially adding to the instability on world markets.

Many of the largest funds of hedge funds have put in big “protective” redemption requests to the hedge funds in which they invest.