Surviving and flourishing following large scale investor redemptions |
Date: Thursday, November 20, 2008
Author: Jamie Murray, Broadgate Alternatives
As the credit crunch and the great leverage unwind continues, some hedge funds are seeing double digit losses, large scale redemption requests and enforced gating of redemptions. The gating of redemptions can be a major issue. It will often rouse the ire of investors to fever pitch. Gating has led to the closing of individual funds and hedge fund companies. As a worst case scenario for a hedge fund it cannot get much tougher. A company in this position needs to tread very carefully in dealing with investors. If poorly handled, the situation can spiral out of control, writes Jamie Murray of Broadgate Alternatives.
I cut my teeth in the hedge fund industry in 1996, and was around to witness the collapse of Long Term Capital Management in 1998. At the time I was working for a fund of hedge funds in a sales position. The two largest funds were each around $300m in size with monthly liquidity in and out. In a single month in 1998, one fund received requests to redeem 30% of assets and the second around 25%. We were faced with a very difficult decision. Should we meet the redemptions by selling down our most liquid investments or consider the interests of the remaining shareholders in the fund and gate redemptions to allow an orderly unwinding of redemption requests? The former would unbalance our portfolio at a time of very high market volatility. With our fiduciary duty to remaining investors in mind, we chose the latter. The typical reaction from investors looking to sell was one of anger. Worse still, by enforcing a gate, other investors decided to redeem. The net result was that we could only provide full payout of redemption proceeds over several months rather than one.In this kind of scenario, it is tempting to put the blame on investors for being short term and keep your head below the parapet. A typical strategy may be to only issue newsletters explaining the situation (that it is an unforeseeable six standard deviation event etc.), perhaps have one or two conference calls, and think that is enough. This approach is probably asking for trouble. In this situation, if the firm is to survive, investors will need a lot of attention and hand holding. A bunker mentality can severely damage a fund in a crisis situation.
We weathered the end of 1998 by working very hard on investor communications. With our CIO, I spent several weeks on planes meeting with investors and distributors around the globe. We worked to ensure that they understood why the situation had arisen and why we had enforced gating. A key was to keep the messages clear and eliminate jargon. We also explained the outlook for hedge fund returns in 1999 (which was looking good) and therefore why redeeming investors might wish to reconsider their redemption requests. On our return, we maintained regular contact, keeping our clients abreast of developments and market outlook. This built an understanding and trust in what we were doing. A number of redemption requests were waived.
In the following 12 months, the situation was difficult, but at least the business' survival seemed assured. Redemptions had largely stopped, and we were starting once again to see inflows. The communications policy had worked. We felt ourselves closer to our clients than we had been before. Nevertheless, having these investors increase positions was tough. The old adage 'once bitten, twice shy' applied to many. We turned our minds to winning new investors and engaged a public relations adviser to help build our profile, support new product launches and help open new markets. Initially, we were sceptical that such PR would help. In fact, it helped greatly. For example, in raising assets from new prospects. We found these much more likely to take our calls and accept meetings having read third party articles about us or 'thought leadership pieces' that we had written. Similarly, by using an expert agency, we were able to achieve targeted coverage in the media read by investor groups that interested us. This communications strategy undoubtedly helped the business step back into a new growth phase and between now and my departure in 2007, we did not look back.
The lessons from this crisis situation were many, but I would summarise them as:
- be proactive with clients and be prepared to make the effort to meet them face to face and explain the situation in person
- be transparent and keep things simple - eliminate jargon
- communicate on a regular basis, and keep communications relevant
- use third party advisers such as PR agencies to help deal with media enquiries. They can develop profile raising strategies with you to support asset raising and retention.
- in today's media, if you have to block redemptions or see large draw downs, the likelihood is that the news will out. It is best to be prepared by having a media relations infrastructure already in place.
Jamie Murray has worked in financial markets for 20 years, 12 of which distributing alternative investments such as funds of hedge funds, hedge funds and private equity. He now runs Broadgate Alternatives, dedicated to PR and digital communications for hedge funds private equity, hedge funds and property companies. Broadgate is an award-winning public relations (PR) and digital communications agency based in the City of London and founded in 1994. He can be contacted on jmurray@bgate.co.uk or +44 (0)207 776 0525. Go to www.bgate.co.uk.