London Diversified Said to Halt Withdrawals From Hedge Funds

Date: Monday, December 1, 2008
Author: Saijel Kishan and Tom Cahill, Bloomberg

London Diversified Management LLP, the 13-year-old firm run by Robert Standing and David Gorton, halted investor withdrawals after its two hedge funds posted their biggest loses, two people familiar with the matter said.

The $3.4 billion London Diversified Fund, started in 1995, fell 25 percent this year through Nov. 21, the people said. The $900 million London Select Fund, opened in April 2004, lost 29 percent.

Standing, 48, and Gorton, 45, founded the Diversified fund at JPMorgan Chase & Co. before going out on their own in 2002. Almost 80 funds have liquidated or restricted redemptions this year as they cope with fallout from the global financial crisis, including announcements this week by Satellite Asset Management LP and Bluebay Asset Management Plc.

“I just don’t think we have seen the end of this process yet,” said Nicola Ralston, co-founder of London-based PiRho Investment Consulting Ltd., which advises clients on investing in hedge funds. “Given the performance numbers that are now emerging, I expect more pain to come.”

Investors pulled $40 billion from hedge funds last month, while market losses cut industry assets by $115 billion to $1.56 trillion, according to data compiled by Hedge Fund Research Inc. in Chicago.

Standing, based in London, declined to comment. Financial News reported the redemption halt earlier today.

London Diversified stopped calculating net asset values for both funds because it was having trouble pricing derivative holdings, said the people, who asked not to be named because the information is private. The problem was exacerbated by the Sept. 15 bankruptcy of Lehman Brothers Holdings Inc., which slowed down the settlement of trades, they said.

Earlier Success

Derivatives are financial instruments used to hedge risks or for speculation. They’re derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates.

London Diversified in April cut fees charged to some clients to 2 percent, the industry standard, from 3 percent for a year after losses in the first quarter. The firm had been able to charge higher fees because of its previous success, including in 1998 when many funds, including Long-Term Capital Management LP, were dragged down by Russia’s debt default.

“No question about it -- 1998 was also a very good year for us because we made 10 percent while everyone else got hurt,” Groton said in an interview for the book “Inside the House of Money,” by Steven Drobny, published in 2006 by John Wiley & Sons Inc.

The Diversified fund limited holdings in any single strategy to 20 percent of assets, while London Select could go as high as 50 percent, according to the Drobny book. London Diversified was marketed with a goal of keeping losses from peak to trough, known as maximum drawdown, to 5 percent. Until this year, the fund’s drawdown hadn’t exceeded 3.5 percent.

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets, bet on falling as well as rising asset prices and participate substantially in profits from money invested.

To contact the reporters on this story: Saijel Kishan in New York at skishan@bloomberg.netTom Cahill in London at tcahill@bloomberg.net;