Hedge Fund Stories and Analysis for the Week of October 5, 2008

This past week has seen no shortage in the amount of articles on the hedge fund industry and the effect of the market and governmental events.  Below I’ve highlighted a few stories which I found particularly interesting and relevant for hedge fund managers.  Additionally, I think the following are points which hedge fund managers should be particularly aware of in light of recent events.

1. Hedge Fund Offering Documents are important. Most hedge fund offering documents are written very broadly and give the manager wide latitude in managing the fund.  The stories below highlight the important powers given to hedge fund managers.

2. Managers should start thinking of long term business continuity planning. While no one wants to think about and discuss what would happen during if the fund does have negative performance during the year, a well prepared manager will have a plan in place.  The stories below on blocked redemptions and re-negotiation of fees is showing us that managers were not prepared for the possibility of running a fund during lean times.  Managers should potentially think about retaining some performance fees in the management company so that they will be able to keep the doors open while trying to claw back to the high watermark.  Additionally, I believe that hedge fund due diligence will begin to include questions on how a manager would deal with a negative year.

Blocked Hedge Fund Withdrawals

A central concern for many market watchers (and investors) is whether hedge funds will have huge redemptions which would spark a sell off over the next couple of months.  We’ve seen some interesting items.  First, there is a fund which is actually blocking investor withdrawals in order to protect remaining investors from a fire sale of the fund’s assets (see story).

Restructure of Hedge Fund Performance Fees

As hedge fund managers see that the is the likliehood of negative returns this year, and the looming hedge fund high watermark provision, managers are rushing to cut deals with investors so that the funds can stay alive for the foreseeable future. According to a Wall Street Journal story, investors in the UK hedge fund RAB Capital agreed to “a three-year lockup in exchange for a management fee of 1% of assets and performance fee of 15% of returns, instead of 2% and 20%.”  The Stamford advocate reported that Camulos Capital LLC, a Greenwich-based hedge fund, and Ore Hill, a New York-based fund, among others, have restructured their fees to keep investors in their respective funds.

ABL Hedge Funds to step into the role of the banks?

If you listen to the news, and even the presidential candidates, you’ll hear about the “impending doom” in the banking industry – how mom and pop shops will not be able to get any loans to keep their business afloat.  While there have been many anectodes which suggest that this is, and is not, the case, it is likely that the banks will choose to pass on certain types of riskier loans, creating a great opportunity for non-traditional forms of finance.  Asset based lending is a hedge fund strategy in which the manager will make loans to business which will be backed by certain collateral, whether a receivable or some other physical asset.

I believe that we are going to see the launch of several asset based lending funds in the next few months and into the next year.  If the current banking climate remains how it is, asset based lending hedge funds might even become the next neighborhood banking center.  I have also previously written about the popularity of asset based lending hedge funds.

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