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Even Hedge Funds with Gains Face Redemptions

Date: Tuesday, December 9, 2008
Author: Svea Herbst-Bayliss, Thomson Reuters.com

Even hedge fund managers with portfolio gains are in trouble this year.

Dozens of managers who are outperforming the market and their troubled rivals with gains of as little as a few percent or as much as nearly 100% are facing a surge of withdrawals as investors try to exit during the worst bear market since the Great Depression.

Connective Capital, a Palo Alto, Calif.-based hedge fund, treated investors in its short strategy to an eye-popping 85% gain this year as its benchmark Nasdaq Index slumped 42%. Still, clients asked manager Robert Romero to return roughly 20% of their capital.

"I ask my investors 'why are you taking money out when we are doing so well?'" Mr. Romero said.

But he acknowledges the pressures these funds of hedge funds face as their own clients demand to get their money out.

Other hedge fund managers who are doing well report similar stories. They complain of being punished unfairly for bad bets their rivals took with borrowed money in illiquid markets.

Since January, the average hedge-fund, which courted investors with promises of positive returns in all markets, has shed about 18%, according to data from Hedge Fund Research, a Chicago firm that tracks industry performance and asset flows.

Some big names such as Kenneth Griffin's Citadel Investment Group are suffering even steeper declines.

"Sometimes the madness of crowds take hold," said hedge fund manager William Fleckenstein, who runs Seattle-based Fleckenstein Capital. "And that is what is happening now as people are redeeming wherever they can."

Mr. Fleckenstein said on Friday that he is closing his short-only hedge fund Previous Reuters Story.

The pace of redemptions quickened in the second half of the year, building steam after Lehman Brothers Holdings Inc. failed in September, the credit markets seized up, growth stalled and job losses mounted.

In October, hedge fund assets shriveled 9% to $1.5 trillion, their lowest in two years, as stock markets tumbled and investors withdrew a record $40 billion, Hedge Fund Research data show.

Since a Nov. 15 deadline to file redemption requests, some fund managers have been asked to return as much as 40% of capital, investors say. J.P. Morgan Chase & Co.'s Highbridge Capital Management unit, for example, has been asked to return roughly 35% of assets from its flagship fund to investors, several investors said.

"People have set their weapons to fire automatically. And they will keep firing until they are out of bullets," said Philippe Bonnefoy who invests in hedge funds as chairman of the asset allocation committee at Geneva, Switzerland-based Cedar Partners, referring to the steady stream of redemption notices.

Numbers like these suggest the industry will shrink further in November and December, even as many fund managers try to bar the exits, if only temporarily.

Paul Tudor Jones, one of the world's most successful fund managers, last week told clients they may not get their money out just yet after they asked to remove 14% from his $10 billion BVI Global Fund Previous Reuters Story.

Similarly, Fortress Investment Group's Wesley Edens suspended redemptions following a surge of requests Previous Reuters Story.

For small funds doing well, the growing trend of suspended redemptions may make life even tougher.

"For us the problem is two-fold," Connective Capital's Mr. Romero said, noting that investors are pulling money out to meet their own obligations and as they rebalance to reflect an unexpected rise in assets due to strong returns. "But I will be patient and expect some of that money will come back next year."

By Svea Herbst-Bayliss