Hedge Funds Get Rattled As Investors Seek Exits Requests by Funds-of-Funds To Pull Out Cash Weaken Performance and Managers' Grip on the Helm By GREGORY ZUCKERMAN and CRAIG KARMIN September 6, 2008; Page B1
With anxiety about hedge-fund woes gripping the market, funds have their own fear: their investors.
Some investors, particularly what are known as "funds of funds," are demanding their money back and may ramp up requests in the weeks ahead. That has prompted hedge-fund managers to sell securities to raise cash.
"As the hedge fund investor base broadens, hedge fund portfolio management...slips out of the hands of the portfolio managers and into the hands of the investors," wrote Andrew Redleaf, who runs Whitebox Advisors, a Minneapolis hedge fund with about $5 billion under management, in an August client letter. "It is no insult to the investors to say that this worsens performance."
Funds-of-funds select hedge funds on behalf of pension funds, wealthy individuals or other investors, and charge a layer of fees on top of the hefty fees levied by hedge funds themselves. They often ask hedge funds for the option to redeem money as often as monthly and get good terms because they can bring in big chunks of cash at once.
Some put in withdrawal notices to keep their options open, though they may ultimately decide to leave the money.
Investors know that it can pay to be the first out the door of an underperforming hedge fund because as other investors cash out, the fund sells its holdings, pushing down prices. Many investors themselves have borrowed funds to juice their returns and when leverage amplifies their losses they can end up more eager to pull out.
In some cases, funds-of-funds withdraw money at their investors' behest, despite solid performance from hedge funds. For 2008, a fund-of-funds run by RCG Capital Advisors in Boulder, Colo., was up about 1% through the end of August, compared with a 13% decline in the S&P 500.
But the fund's manager, Ken Phillips, says he is redeeming $100 million from 36 hedge funds because one of his key investors, a financial company, had a setback and needs its money now.
"It's got nothing to do with performance," Mr. Phillips says. "Global concerns are pushing people to require liquidity when they might not have needed it two years ago."
Hedge funds overall lost slightly more than 3% through July, compared with a drop of more than 12% for the stock market in the same period. But certain brand-named funds lost much more, raising concerns about how they will survive.
Hedge-fund pay largely comes from fees from investment gains.
"A lot of institutions and veteran investors in hedge funds aren't making massive redemptions, but newer investors into funds are more concerned because of some of the losses this year," says Robert Discolo, head of hedge-fund strategies at AIG Investments, which invests about $10 billion in hedge funds. "And it looks like high-net-worth clients are a little more impatient and are pulling out."
Mr. Discolo says his group, which has avoided recent blowups, isn't cutting significant amounts from funds. Rather, it is doing more shifting among funds, pulling out of those that it worries won't survive or will have trouble retaining key traders and analysts because of big losses.
"The deficiencies of certain hedge-fund managers are being revealed," he says.
While shifting among hedge funds is likely over the next few months, the long-term move by many investors into hedge funds is expected to continue.
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