Funds reopen to aid redemptions

Date: Wednesday, December 10, 2008
Author: Deborah Brewster in New York, FT.com

Mutual funds and hedge funds that have been closed to new investors for years are reopening in record numbers in an attempt to pull in cash to cover big redemptions.

More than 200 mutual funds have reopened this year, according to Morningstar, compared with 100 last year and just a handful the year before.

The latest to reopen is Fidelity’s Contrafund, which had been closed for two years and will reopen on December 16. Fidelity has re-opened five funds this year, including its flagship Magellan fund, which had been closed for more than a decade.

Hedge funds that officially remain closed have this year been approaching selected investors with invitations to subscribe, according to hedge fund advisers and investors.

Both mutual funds and hedge funds are grappling with record redemptions as investors respond to continued losses by pulling out their money. The funds are being forced to sell to meet redemptions, and reopening is one way to help stem falling assets under management.

More than $367bn has been pulled from equity funds, and $66bn from bond funds in the year to date, according to Emerging Portfolio Funds Research, which tracks fund flows.

Those are easily record outflows both in dollar terms and in the percentage of total assets under management. Last year, equity funds had outflows of $91bn, while bond funds saw inflows of $6.7bn.

Investors also withdrew a record $72.5bn from hedge funds in the four months to October, according to Hedge Fund Research. In the 10 months to the end of October, they withdrew net $43bn.

Most funds close to new investors after reaching a certain size, as managers believe that a fund becomes ineffective and unable to maintain returns after a certain size. Many of the best known and best performing hedge funds – such as James Simons’ original Renaissance fund and George Soros’s Quantum fund – are closed to new investors.

Fidelity has reopened its Contrafund, which is managed by Will Danoff, and the Low-Priced Stock Fund, managed by Joel Tillinghast. The two award-winning managers are among Fidelity’s best performers.

Walter Donovan, the president of Fidelity’s equity division, said the decision to re­open was long term and not only related to this year’s redemptions, he said.

“The vast majority of assets invested in both funds – 88 per cent for Contrafund and 85 per cent for Low-Priced Stock Fund – are earmarked for retirement,” he said.

As the shareholders grew older, they began to draw on the money for their retirement.