Hedge Fund Investors Take Their Revenge

Date: Friday, January 15, 2010
Author: Saijel Kishan and Katherine Burton, Bloomberg

Big returns are back, but that's not enough to keep angry clients from pulling billions out of hedge funds that blocked withdrawals during dark times

Since their record losses in 2008, hedge funds have staged a comeback, posting a 20% gain last year. So why are many investors still wary?

Partly it's because they could have made more in the S&P 500-stock index, which returned almost 27% in 2009, and avoided those pesky, high fees. Some simply aren't happy with the way they were treated when hedge funds barred redemptions during the market's darkest days. Pension funds, foundations, and wealthy individuals yanked $118 billion from hedge funds in the first 11 months of 2009, and many continue to hoard cash. "Before, managers could rely on their returns to sell themselves," says Andrea Gentilini, head of strategic consulting at Barclays Capital's Prime Services unit in New York. "Now investors want more transparency and communication."

Citadel Investment Group, the $13 billion Chicago money management firm run by Ken Griffin, lost 55% in 2008 and suspended withdrawals for much of 2009. Despite returns that soared 62% last year, clients nonetheless pulled $500 million from the firm. "Some managers that prevented investors from getting their money back have done terrible long-term damage to their businesses," says Simon Atiyah, an attorney at London-based law firm Lovells, which represents hedge funds. Citadel declined to comment.

Amit Shabi, a Paris-based partner at Bernheim Dreyfus, a money manager, says his firm won't invest in any hedge fund that imposed restrictions on withdrawals. "Many managers acted like traitors," he says. Drake Management, the New York firm founded by former BlackRock managers, had to shelve plans for a new fund late last year after it couldn't drum up enough cash. The firm shut its flagship vehicle in 2008 and suspended redemptions. Investors are still waiting to get their money back. Drake declined to comment.

Meanwhile hedge fund firms that allowed withdrawals during the downturn have become so popular that they're turning money away. At least six funds—including Paul Tudor Jones' BVI Global Fund, Brookside Capital Partners, an affiliate of Boston-based Bain Capital, and the $21.3 billion Brevan Howard Master Fund—are limiting new cash because their assets have ballooned. It's a step managers take when they feel their funds have gotten too big to run effectively. The firms declined to comment.

These portfolios have attracted cash with a combination of consistent, long-term gains and investor-friendly behavior. Jones, the 55-year-old former commodities trader whose BVI Global has returned an average of 22% a year since it was started in 1986, briefly suspended withdrawals from the fund in November 2008. The firm then quickly placated clients by returning some of their money. It paid off: Between March and July, investors put $1.3 billion into BVI Global. Says Debra Pipines, founder of New York-based Asperion Group, which raises money for hedge funds: "Managers that honored their agreements and treated their investors as partners during the last 18 months of economic difficulties are being rewarded with additional money."