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The freezing of redemptions by several fund-of-hedge-funds that invest in offshore feeder funds has exposed a glaring anomaly between the Australian and US regulatory systems.
The anomaly means that Australian investors into offshore feeder funds managed by Westpac's BT Investment Management and HFA Holdings cannot access their money while US investors can cash out at will.
The anomaly raises a number of questions that are not being answered by the funds involved, even though at least one of them blames the media for its problems.
The questions that cannot be put to the managers because they don't want to comment are as follows:
– Are Australian investors frozen out of vehicles that invest in international fund-of-hedge-funds being treated fairly and equally if the feeder fund is continuing to pay redemptions to non-Australian residents?
– Will the proportion of illiquid investments in an international feeder fund grow as a percentage of total assets if non-Australian residents are allowed to redeem their holdings?
– Are the details of illiquid assets held by international feeder funds, including the amount and type of assets that are illiquid, provided to Australian funds that invest in them?
The latest fund to be engulfed by the redemption freeze sweeping the industry is the BT Global Return Fund, which is managed by Westpac subsidiary BT Investment Management.
It follows the suspension of redemptions for Australian residents by Macquarie Equinox Trusts, DWS Strategic Value, Goldman Sachs JB Were Multi-Strategy Fund, Select Gottex Market Neutral Fund, the Credit Suisse/Tremont index Strategies Fund and the HFA Octane Funds and HFA Diversified Funds.
BT Investment Management was unwilling yesterday to say anything beyond the short statement released on its website on December 19.
That statement said that redemptions had been suspended following receipt of a notification that underlying manager Grosvenor Capital Management had taken action to segregate a proportion of the less liquid assets in the Grosvenor Master Fund in which the BT Global Return Fund invests. Grosvenor has not suspended redemptions in the Grosvenor Master Fund.
BT did not say or would not admit that based on its limited public disclosure there has been a run on redemptions in the BT Global Return Fund.
Assets at the end of September were $1.2 billion, according a document on the BT website. But the latest report on the fund for November said funds under management were $922 million.
In other words, a quarter of the fund was withdrawn in a month, though of course some of this disparity could also be due to falls in asset values. Attempts to clarify this with BT yesterday were unsuccessful.
However, the fund's annual report shows that in the year to June 2008, the level of redemptions rose more than threefold on 2007 to $326 million. That caused a $67.8 million decline in net assets attributable to unitholders. The BT Global Return Fund monthly reports give a breakdown of the style of investment being used but no names of the hedge funds managing the money.
The freezing of redemptions will have an impact upon many BT funds because about $217 million of the fund is sourced from 30 different BT funds.
This cross investment by one fund manager in its own array of products is a feature of the industry that may cause corporate governance concerns and trigger conflicts of interest.
BT's unwillingness to discuss the fund is in keeping with the attitude taken by its competitor HFA Holdings. Its managing director Robert White has refused to answer calls from Business Spectator.
However, HFA this week succumbed to pressure from financial planners for greater detail about why its suspended redemptions in three funds with assets of about $1 billion.
HFA sent a seven page letter to advisors yesterday by email providing more detail about the suspension of redemptions. It was in a question and answer format.
The letter said that HFA Asset Management had not seen a material spike in redemptions from retail investors and as such its suspension of redemptions was not a consequence of a “run” on the three funds that invest in the Lighthouse Diversified Fund.
“Whilst the Lighthouse Diversified Fund has not suspended withdrawals it is implementing a change in its withdrawal payment policy which will result in redemptions being satisfied by a combination of cash and an 'in kind' distribution of interests in a special purpose vehicle established by the Lighthouse Diversified Fund, which will hold interests in certain designated, less liquid investments,” the manager said.
This sheds some light on the problems and may be what is happening in the fund that underpins the BT Global Return Fund.
HFA said that under the Corporations Act it had to suspend redemptions once the fund was not able to provide redemptions in cash. This contrasts with the situation in the US were investors in the Lighthouse Diversified Fund have access to a proportion of their cash.
Although this goes some way toward explaining the anomaly it is not crystal clear whether Australian investors will be worse off compared to investors in other jurisdictions.
A broader message from the latest local developments in the hedge fund liquidity crisis is that lack of transparency is accepted as part of the industry's way of doing business.
Both Grosvenor Capital Management and Lighthouse Investment Management have websites that are the equivalent of a blank screen. No information is available without a password.
The secretive attitude is undermining the efforts by some hedge fund managers to present themselves as open and transparent investment managers.
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