Deephaven halts redemptions on multi-strategy fund

Date: Monday, November 3, 2008
Author: Yaël Bizouati, Financial News

Deephaven Capital Management, the hedge fund arm of institutional broker Knight Capital Group, has halted redemptions from a multi-strategy portfolio after investors asked to withdraw almost a third of the fund’s value amid multi-billon dollar requests to redeem capital in the wider hedge fund industry.

In a letter to investors sent yesterday, Colin Smith, Deephaven chief executive, said the group has frozen new redemption requests and withdrawals from its Deephaven Global Multi-Strategy Fund, following challenging market conditions and pending redemption requests.

The letter did not provide any detail on how long the restrictions would stay in place.

Investors have so far requested to redeem 30% of the fund’s $1.6bn (€785m) in assets. It comes amid $31bn in withdrawal requests hedge funds in the quarter ending September 30, the largest amount since 1993, according to Hedge Fund Research.

In the letter obtained by Financial News, Smith said that difficult market conditions had significantly deteriorated market liquidity across virtually all investment products, including many of the investments held indirectly or directly by the fund.

He said: “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.

“While the times and circumstances are extraordinary, and the decision to suspend redemptions is a significant one, Deephaven believes that it needed to act decisively in the best interests of all investors in the fund.”

He added that the firm believes trading opportunities are developing in the markets, especially in the credit and convertible bond spaces, but expects a period of “significant economic and financial weakness.”

The fund reported year-to-date losses of 15% through September 30 and Smith, who qualified it as “a disappointing and unprecedented drawdown,” estimates losses for October will be an additional 10%.. Since inception in 1994, the fund has achieved a net annualized return of 16%.

Smith said that several strategies the fund employs, including convertible bonds, corporate and distressed bonds and loans, and credit derivatives, have been hit by the pace and magnitude with which the credit markets have effectively frozen.

In addition, prime brokers and banks have increased their margin requirements, resulting in either a forced selling of assets, for Deephaven and other funds, into an illiquid market or the posting of more liquid assets to meet margin calls, he said.

A spokesman for the group declined to comment.

Write to Yael Bizouati at yael.bizouati@dowjones.com