Hedge Fund Withdrawals Accelerate

Wall Street Journal
8 December 2008
Hedge Fund Withdrawals Accelerate
November Demands from Investors Deepened the Worst Year on Record
By JOSEPH CHECKLER

NEW YORK -- November rain poured down on hedge-fund managers as market turmoil and increased demands from investors wanting their money back deepened problems for funds already facing their worst year on record.

The largest hedge funds run by Toscafund Asset Management LLP and Kingdon Capital were among many funds with heavy losses in November, according to investors. Satellite Asset Management, founded by former Soros Fund Management traders, saw double-digit losses during the month and is reportedly among a handful of funds that have tried to stem investors' redemptions.

Many big-name hedge-fund managers have been hit by massive demands for withdrawals, forcing the funds to put up "gates" to slow redemptions or to stop them altogether. In recent days, funds run by Fortress Investment Group LLC, Tudor Investment Corp. and D.E. Shaw & Co. have curbed redemptions.

While some managers, such as John Paulson, have emerged as bright spots in an otherwise awful year, good performance has certainly been the exception. The average hedge fund is down more than 16% this year, according to data provider Hedge Fund Research. The Standard & Poor's 500-stock index is down 40%.

The continued deterioration of the performance of hedge funds heightens concerns that they will be forced to sell more of their good assets in order to satisfy the backlog of redemptions. That selling could put added stress on the markets, as the global hedge-fund industry manages more than $1.5 trillion.

Mitch Kaye, a hedge-fund consultant, said nearly every fund he has seen has run into some form of trouble, whether they are considering halting redemptions or slowing them. Mr. Kaye is a managing director of Navigant Capital Advisors, a unit of consultancy firm Navigant Consulting Inc. that provides consulting for financial institutions under duress, including hedge funds.

Among major funds, Fortress' $7.2 billion Drawbridge Global Macro Fund, which has seen a curb on investor redemptions, lost 2.3% in November and is now down 23% for the year, according to investors. The publicly traded alternative-asset manager's stock recently traded down 10% at $1.70 and is down nearly 90% for the year.

Toscafund, which is run by Martin Hughes, saw its $3.4 billion Tosca Limited Fund fall 5.2% in November, according to investors, meaning it is now down 68% for the year. Mr. Hughes has run into trouble in several ill-timed banking investments.

Kingdon Capital, which is run by Mark Kingdon, saw its $5.2 billion M. Kingdon Offshore Fund fall 4.4% in November, making its year-to-date loss 24%.

Mr. Paulson, who in 2007 earned more money than any other manager thanks to his bet against subprime mortgages, had a great November in several of his funds. His Paulson Advantage Plus Ltd. fund, which manages $9.5 billion, gained 3.2% in November and is up 34% for the year, according to investors. His $5.2 billion Credit Opportunities fund, the big winner in 2007, was down a bit in November but is still up 14% for the year.

Several star managers who had been having trouble rebounded, or at least stopped the bleeding, in November. Lee Ainslie's Maverick Fund was flat for the month, but it is still down 27% for the year. The largest fund run by David Einhorn's Greenlight Capital gained 3.9%, although it is still down 20% for the year.

In an indication of the global reach of the financial and economic woes, several hedge funds that focus on emerging markets continued to face difficulties in November.

Hedge funds investing in Russia, the darlings in the industry just a few years ago, are one of the worst-performing groups this year.

Hermitage Fund lost almost 20% in November and is down more than 70% for the year. Hermitage's founder, William Browder, is said to be winding down the fund. Mr. Browder has seen his offices raided by Russian Prime Minister Vladimir Putin's government, and Mr. Browder himself has been barred from entering Russia.

Other poor-performing Russian funds include Alexander Branis's Russian Prosperity fund and Harvey Sawikin's Firebird family of funds.

Among the hedge funds with the biggest losses through November is the 788 China Fund, whose returns were down about 95% year-to-date. It was up 115% at the end of 2007, making it one of the best.

"Only the one who sells loses money," the fund's managers, Jacques Mechelany and Benjamin Grenier, said in June of this year, when the fund was down 31%. He who sells, they said, "prevents his own self to ride the unavoidable extremes and volatility of markets that are temporarily disconnected from the reality of fundamentals and benefit from the very strong rebound once the fundamentals come back to the fore."

The Templeton Emerging Market Fund, run by high-profile emerging market investor Mark Mobius, is down 56% for the year.

—Dan Molinski and Geoff Rogow contributed to this article.