Friday, December 5, 2008
Modern-day Bank Runs and Bank Holidays
Here is a modern-day version of the "bank holiday". The hedge fund freezes the funds the minute you want to take them out.
D.E. Shaw, Farallon Restrict Withdrawals as Fund Freeze Deepens
By Saijel Kishan and Katherine Burton
Dec. 4 (Bloomberg) -- D.E. Shaw & Co. LP, the investment firm run by David Shaw, and Farallon Capital Management LLC limited withdrawals by clients, joining more than 80 hedge-fund managers to impose restrictions in the past two months.
D.E. Shaw, which oversees $36 billion, capped redemptions from its Composite and Oculus funds, said two people familiar with the New York-based company. Farallon, a $30 billion firm based in San Francisco, did the same with its biggest fund after investors asked to get back more than 25 percent of their money.
The firms are two of the biggest to block withdrawals, known as putting up gates, so they aren’t forced to liquidate investments at distressed prices to raise cash. New York-based Fortress Investment Group LLC said yesterday it froze an $8 billion fund after getting redemption requests for 40 percent of its assets. Tudor Investment Corp., the Greenwich, Connecticut, firm run by Paul Tudor Jones, locked the $10 billion BVI Global fund last week ahead of plans to split the fund into two.
“There’s no longer the stigma associated with putting up gates or suspending redemptions as it was before this crisis,” said Jaeson Dubrovay, head of the $19 billion hedge-fund group at consulting firm NEPC LLC in Cambridge, Massachusetts. “It’s actually being encouraged by some large institutions as a way to protect longer-term investors from those who panic and redeem.”
Darcy Bradbury, a spokeswoman for D.E. Shaw, and Steve Bruce, a Farallon spokesman, declined to comment.
Industry assets peaked at $1.9 trillion in June, data compiled by Chicago-based Hedge Fund Research Inc. show. Investment losses and withdrawals may shrink that amount by 45 percent by the end of this month, according to estimates by analysts at Morgan Stanley.
The gate on D.E. Shaw’s Oculus fund was triggered after the company received redemption requests for more than 8 percent of assets, said the people, who asked not to be identified because the information is private. The fund, which tries to profit from global economic trends, is up about 10 percent this year, compared with the average 16.4 percent decline for the industry through October, Hedge Fund Research reported.
Investors asked to redeem more than 6 percent of D.E. Shaw’s Composite fund, which pursues multiple investment strategies and has lost 4 percent.
Even hedge funds that are outperforming peers have been hit by redemptions because they are a more ready source for cash for investors. Shaw, 57, started his firm in 1988 and has 1,600 employees worldwide.
First Losing Year
Farallon, founded by Thomas Steyer, told investors in a letter that Farallon Capital Institutional Partners LP plans to resume redemptions as early as January. Meanwhile, they won’t be charged management or incentive fees. They will pay expenses such as legal and accounting fees, according to the letter, which was posted yesterday on the Web site dealbreaker.com.
The Farallon fund fell 23.8 percent through October, and is headed for the first annual loss in its 22-year history. Steyer, 51, invests in assets from stocks to distressed debt and real estate. His main fund climbed at an average annual rate of 14.6 percent for the past 22 years, compared with about 9 percent for the Standard & Poor’s 500 Index.
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 firstname.lastname@example.org; Katherine Burton in New York at email@example.com
Last Updated: December 3, 2008 22:14 EST
But wait! There's more!
From The Times
December 4, 2008
Fortress suspends redemptions as investors seek to pull $3.5 billion
Fortress, the New York-listed hedge fund, became the latest victim of the market crunch last night as it suspended redemptions on four of its flagship Drawbridge funds after investors moved to pull $3.5 billion (£2.4 billion) – almost half the funds’ assets.
Shares in Fortress, one of the few listed hedge funds, lost more than 25 per cent as it said that redemptions meant the assets managed by the four funds would fall to $3.65 billion by January.
Wes Edens, Fortress’s co-founder and chief executive, has already told shareholders that investors were preparing to redeem capital as they seek safer-haven assets to escape the hedge fund rout. Despite this, yesterday’s alert sent shares as low as $1.71 in early trading before they closed at $1.87.
At the end of September, Fortress was one of the world’s biggest hedge fund managers, with assets under management of $34.3 billion. Its latest decision underscores how wide-reaching the hit on the industry has become. Fortress said that its move was temporary but gave no date for unfreezing the funds.
Fortress has “evaluated the most appropriate course of action to take in response to the requested redemptions . . . and [has] acted unanimously to temporarily suspend pending redemptions from the fund”, the group said in a filing to the Securities and Exchange Commission, the American regulator.
Fortress offers its investors monthly opportunities to withdraw their assets. It said that the $3.5 billion related to November and this month, adding that it had already briefed investors about $1.5 billion of the $3.5 billion.
Hedge funds are suffering their worst performance for ten years and worldwide the industry is on course for an annual loss, only its second ever. Sliding bond and equity markets and panic-stricken reactions by investors have combined to reduce hedge funds’ total assets under management to about $1.5 trillion, compared with $2 trillion at its peak, according to estimates from Hedge Fund Research, the Chicago research firm.
Funds have been rushing to shut the door on investors, as well as restructuring their investment vehicles and cutting management and performance fees in order to bolster their businesses.
Paul Tudor Jones, one of the best-known hedge fund managers, last week suspended redemptions on his Tudor Investments’ $10 billion BVI Global fund while he and his team moved to restructure the underperforming parts of the fund. Tudor had faced $1.4 billion in redemption calls in recent weeks, Mr Jones wrote in a letter to investors.
Fortress said that the redemption freeze applied to four Drawbridge Global Macro funds, which place big directional bets on macroeconomic events such as interest rates and long-term currency convergences.
Suspending redemptions was once a sign that a fund was about to fail, but it is now a much more accepted tool to safeguard capital, for a while at least. The hedge fund industry shrank by 9 per cent in October when investors withdrew a record $40 billion.