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Monday, December 01, 2008 12:02 PM

Hedge Funds Impose Emergency Measures To Block Withdrawal Requests

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Battered by a sinking global economy Hedge funds hit by fresh wave of withdrawals.

Hedge funds have been hit by a fresh wave of withdrawals as investors search for cash, prompting more funds to impose emergency measures to block repayments.

London Diversified Fund Management, one of Britain’s best-known fixed- income managers, on Friday suspended both its hedge funds as trading conditions in the derivatives markets created valuation difficulties ahead of redemptions.

LDFM, founded by former JPMorgan bankers David Gorton and Rob Standing, manages close to $3bn (£1.9bn), down from a peak of $8bn after its main fund fell 23 per cent this year and investors pulled out. LDFM is joining a roster of hundreds of hedge funds in restricting withdrawals, with investors and prime brokers estimating as many as a fifth have suspended or limited what investors can get back as they have their worst year on record.

This week CQS, a London convertible bond specialist run by former Credit Suisse banker Michael Hintze, began canvassing investors on whether it should change the terms of its main fund to allow it to restrict withdrawals if markets worsen next year.

Huw van Steenis, analyst at Morgan Stanley, said industry assets could shrink 35-45 per cent from June’s $1,930bn by the first quarter of next year, as heavy redemptions added to the pain of poor performance.

Two Bank of New York Mellon funds of hedge funds told investors this week they planned to restructure because almost a third of the funds in which they invest had limited redemptions. The Sanctuary I and II funds will split into continuing and wind-down classes, with pay-outs of about a third of the wind-down class expected early next year.

On Friday, London’s $4.3bn Atlas Capital, owned by New York-based Sciens Capital Management, suspended withdrawals from a dozen funds of hedge funds, while Crédit Agricole and Grenfell PAI each suspended a fund of funds as underlying hedge funds restricted withdrawals.

“We have seen really accelerating redemptions around the 30 per cent level,” said Derek Stewart, a director of Mellon Global Alternative Investments, which manages the Sanctuary I and II funds. “The reason for doing this [restructuring] is purely to protect the interest of investors.”
Tudor Investment Corp. Suspends Redemptions

Bloomberg is reporting Tudor’s BVI Halts Withdrawals, Plans Hedge-Fund Split.
Tudor Investment Corp., the firm run by Paul Tudor Jones, temporarily suspended redemptions from the $10 billion BVI Global Fund Ltd. as it plans to split the hedge fund into two, according to a person familiar with the matter.

Tudor is proposing to put hard-to-sell investments, mostly corporate bonds and loans from emerging markets, into a new fund called Legacy, said the person, who asked not to be identified because the information is private. BVI Global, which started in 1986, would focus on easier-to-trade stocks, bonds, commodities and currencies.

More than 80 firms have liquidated funds, restricted redemptions or segregated assets following stock-market declines and a credit freeze that started with rising defaults on U.S. subprime mortgages.

Tudor, which oversees $17 billion, is asking BVI Global investors to approve the plan to split the fund in the next two months. Clients would have their money allocated between BVI Global and Legacy based on the division of assets, said the person. Tudor wouldn’t be able to charge investors a performance fee until the Legacy assets exceeded their high watermark, or peak value. The firm would sell off the assets in Legacy next year and return money to clients.

Hedge funds have posted losses averaging 22 percent this year through Nov. 24, according to Chicago-based Hedge Fund Research’s HFRX Global Hedge Fund Index. Investors such as pension funds and university endowments are pulling their holdings from hedge funds after they “over-committed” to private equity investments, van Steenis said.
Mistake To Block Withdrawals

Suspending withdrawal requests is a mistake. Investors remember that Bear Stearns blocked redemption requests on two of its hedge funds and both went to zero. By blocking withdrawals, hedge funds are creating a pent-up desire to get out.

Furthermore, by suspending withdrawals, investors are going to have a heightened sense of mistrust of investing in hedge funds even after the market does bottom. Looking ahead, someone who wanted out but could not get out is unlikely to ever invest in hedge funds again.

The hedge fund industry is going to collapse in the wake of mismanagement, excessive use of leverage, blocking withdrawals, excessive fees, and a heightened sense of mistrust everywhere. Hedge funds were supposed to make money in any environment, either up or down, collectively they clearly failed.

Bearish Structural Connotations

My friend "BC" pinged me with these thoughts earlier today.
A bearish structural factor bearing down on the US economy and equity market will be tens of millions of Boomers (retiring and being "retired" involuntarily) being involuntarily fired from employment at peak earnings, many of whom will never again earn anywhere near their peak earnings (and medical and life insurance benefits).

Boomers by the millions will be forced to draw down on assets (declining in value) at a much faster rate than they or most economists imagined in an attempt to maintain the Boomer consumer lifestyle.

Hedge fund withdrawals are occurring as many financial services types (hedgies, mutual fund mismanagers, bankers, etc.) are seeing their livelihoods and a large share of their net wealth evaporate at an alarming amount and rate. Private schools, private clubs, religious institutions, charities and not-for-profit entities, etc., are now being negatively affected by the meltdown in financial assets, including leveraged real estate.

The deleveraging/liquidation process is still underway for hedge funds and barely just beginning in the overall US and global financial systems.

The rally from SPX 741 to 896 was the obligatory bear market rally of ~20% (~$1.7T addition to market cap), so a correction of at least half that rally is quite common; but so is a test of the low or lower lows.
Mike "Mish" Shedlock
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