Psychology Of Suspended Redemptions

So far this month, seven hedge funds suspended redemptions. Blue River and GO Capital are two of the latest. Let's take a look.

Blue River to Liquidate Hedge Fund

Blue River Asset Management’s main municipal-bond hedge fund, which reportedly previously held more than $1 billion in assets, is liquidating after a harsh sell-off in the bond market, Reuters said.

Blue River, however, recently raised about $110 million from investors with the help of JPMorgan Chase and plans to open a new domestic fund to stay in business, Reuters added.

Earlier this month, Blue River reportedly suspended investor redemptions in its main fund.

GO Capital Halts Fund Redemptions

GO Capital Asset Management temporarily halted redemptions from its Global Opportunities Fund, in what Bloomberg News said was “at least the seventh hedge fund in the past month forced to take steps to protect itself from market fluctuations.”

GO Capital focuses on listed European stocks and was founded in 2000 by Frans van Schaik, the former head of equity research at ABN Amro Holding.

Mr. van Schaik said the fund, with assets of about 570 million euros ($881 million), is not leveraged and not facing margin calls, Bloomberg said.

“A temporary suspension of redemptions is the best defensive measure to protect the interests of the participants,” Mr. van Schaik and other members of GO Capital’s management said in a letter posted on their Web site. “Current market circumstances do not allow the fund to sell investments at a reasonable price.”

The following attitude is a sure sign of failure: “Current market circumstances do not allow the fund to sell investments at a reasonable price.” Hedge funds should never put themselves in such a position.

Furthermore, temporary suspension of redemptions are never a solution. Let's take a look at what happened to two Bear Stearns hedge funds that waited for "reasonable prices"

Flashback July 7, 2007:
The Redemption Trap & Merrill Lynch Cover-Up

Marked Down

No takers at 11 cents on the dollar should put a new perspective on the meaning of marked to market. The best bid was 30 cents on the dollar for assets held by the High-Grade Structured Credit Strategies Fund and a mere 5 cents on the dollar for the High-Grade Structured Credit Strategies Enhanced Leveraged Fund.

Bear Stearns should have taken the nickel and the 30 cents in July. The Enhanced Leveraged Fund eventually went to zero and the High-Grade Fund went for something like 12 cents.

Bear Stearns halted redemptions in January. Investors might have been able to get 50 or 60 cents on the dollar then.

Flashback January 27, 2008
10 European hedge funds have suspended redemptions

Flashback February 15, 2008
Citigroup bars investor exits from hedge fund

On March 11, 2008 Citigroup Commits $1 Bln to Shore Up Muni Hedge Funds.

Citigroup (C) on Tuesday said it would commit $1 billion to shore up six leveraged municipal bond hedge funds that have been hammered by steep declines in asset values in recent weeks.

The funds, managed by Citi under the ASAT Finance and MAT Finance names, have already soaked up some $600 million to allow them to continue trading and meet margin calls, said Citi. The funds held about $2 billion in bonds, backed by another $13 billion or so in debt, or leverage.

Today, Carlyle Capital was wiped out because of 32:1 leverage. See Leverage Wipes Out Carlyle Capital.

Psychology Of Suspended Redemptions

GO Capital will not be subject to margin calls because it does not use leverage. However, all GO is accomplishing by suspending redemptions is creating pent up desire to exit. Meanwhile there is likely pent up downward pressure on the assets it is holding.

Collectively this wave of liquidations and suspended redemptions is going to psychologically pressure scores of hedge funds.

Certainly, if I was in a hedge fund, any hedge fund that I though could or would suspend redemptions, I would be gone. It can't be too long at the rate of suspensions we are seeing before that psychology catches on. And when it does, (if indeed it hasn't happened already) any hedge fund using leverage or trapped in illiquid positions will be in deep trouble.

Selling begets selling. More selling is coming.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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