Many hedge fund managers who are registered as investment advisors with the SEC have experienced losses this year as well as investor redeptions. For some managers the losses combined with investor redemptions may have the effect of decreasing an advisor’s assets below the $25million threshold for SEC investment advisor registration. Generally an investment advisor is not allowed to be registered with the SEC if the manager’s assets under management do not exceed $25 million. Continue reading
It is no secret that many funds are hurting this year and that many investors are getting ready to, or have, pulled money from many hedge funds. According to a New York Times article this morning, these redemptions are likely to cause managers to sell securities which may in turn further depress prices. While the time period for hedge fund-of-funds redemptions has likely passed (FOFs usually require 95 days prior notice for redemption), redemption notices for normal hedge funds are due by tomorrow (assuming a 90-day notice period and end of year or quarter redemptions).
If your fund is feeling the pressure of quite a few redemptions, there are a couple of standard safeguards which are usually built into the hedge fund offering documents. These provisions include the hedge fund gate provision and a general catch-all provision. In general, the gate allows redemption requests to be reduced to a certain percentage of the fund’s total assets during any redemption period. For example, if the fund has a gate of 15% and investors request redemptions which equal 20% of a fund’s NAV, then all redemption requests will be reduced pro rata until only 15% of the redemption requests are met. The catch all provision allows a hedge fund manager to halt redemptions if certain catastrophic market events take place. Depending on how the hedge fund offering documents are drafted, the current market situation may or may not apply and you should discuss this with your lawyer.
How to handle invoking a gate provision
In the next few days, managers will be getting a good idea of how much of the fund will be redeemed. If a decision is made to invoke the gate provision, the manager should discuss this option with his attorney. The attorney will help the manager decide the best course of action with regard to reducing the redemption amount, which will probably include writing a letter of explanation to the investors. While each fund’s situation is different, that letter should probably include the expected amount of the reduction as well as a description of the authority (in the offering documents) for the reduction. Additionally, you should also invite questions directly – it is during times like these when investors get scared and then start talking to their own attorneys. It is much better to be candid and upfront than to receive a nasty letter from an attorney in the future.
I previously wrote an article about distressed debt hedge funds and the popularity of such funds as they try to get in for a deal. However, the considerable amount of media attention which has been focused on this sector of the market has spooked investors enough to get them moving on redemption day. FINaltenatives is reporting that a fairly large hedge fund managed by Turnberry Capital Management is completely closing its doors. It is at least somewhat surprising that a group this large (the fund reportedly ran up to $800 million at one point) would close its doors immediately instead of trying to wind the fund down over the course of a couple redemption dates.
A few reasons why they might want to wind down the fund over a period of time may include: (1) the fund offering documents did not include a hedge fund gate provision, (2) the manager no longer thought the fund’s strategy was viable with such a severely reduced asset base or (3) the manager thought that he could get the best prices on the assets if he sold them in a large bundle instead of piece meal over time. The article also stated the manager is planning to start a corporate bond fund, which is another reason the manager decided to wind the fund down immediately.
What is most interesting about this event is the disconnect between the strategies managers wish to pursue and the strategies that the investing masses are willing to (remain) invest(ed) in.
The article is at http://www.finalternatives.com/node/5251.