Hedge Funds Eye Unlocking Gates

Date: Wednesday, June 10, 2009
Author: Kaja Whitehouse, NY Post.com

Hedge funds may have found a way to keep both themselves and their investors happy when it comes to redemptions.

After drawing fierce criticism from investors for imposing so-called "gates," those dreaded redemption restrictions imposed by hedge funds to prevent mass withdrawals from a fund, some hedge funds are testing a new strategy that seeks to curb redemptions while at the same time giving all investors a way out.

Rather than let investors who arrive at the gate first redeem as much as they want up to an allowable amount, fund firms are now promising that anyone who wants out will be guaranteed equal withdrawals. Among those hedge-fund firms trying out the new strategy is the $9 billion Marathon Asset Management, sources said.

The new rules address a longstanding gripe by hedge-fund investors when it comes to gates. Under traditional rules, when a gate is imposed, investors are allowed on a first-come, first-served basis to redeem a portion of a fund's total assets, often around 20 percent.

Marathon, a Midtown shop specializing in credit and structured products, adopted the new gating system for two of its new funds launched this year, according to people familiar with the situation.

In Marathon's case, if gates ever need to be raised on the two funds, investors will be permitted to withdraw up to 50 percent of their own investment at the outset. They can then withdraw the rest in six months.

Whether hedge fund investors buy into the new system remains to be seen, but "dozens" of hedge funds are already adopting it in hopes that it will calm investors' nerves, said a prime brokerage official with a Wall Street investment bank.