The dominoes continue to fall in the fund of hedge funds sector as deteriorating liquidity in underlying investments forces managers higher up the chain to suspend redemptions.
Lack of liquidity in underlying investments was always going to be problem for fund of hedge funds, particularly those funds with a limited number of underlying investments or funds concentrated in a limited number of strategies
The hedge fund experience carries a subtle warning for investors exposed to other similarly structured investments such as superannuation funds that invest into illiquid underlying investments, have the potential to be frozen or suffer big falls in asset values.
Investors in a series of funds managed by HFA Holdings Ltd, a listed fund of hedge funds manager, today joined the hedge fund victims whose assets have been frozen “in the interests of all unitholders”.
HFA shares fell 50 per cent after it suspended redemptions from the HFA Diversified Investments Fund, the HFA Octane Fund and the HFA Octane Fund Series 2.
All three funds invested in about 50 investment managers using about a dozen different investment strategies. The performance this year has been disappointing with returns ranging from -16 per cent to -20 per cent.
HFA said it would not suspend redemptions in the Lighthouse Partners Diversified Fund. Instead a part of each redemption request from this fund will be transferred to a special purpose vehicle designed to hold less liquid investments until they are liquidated.
It has been a bad month for HFA. Earlier this month the listed HFA Accelerator Plus said it would redeem all its leverage notes and swaps. The leverage worked in the good times but it is now magnifying negative returns.
HFA has also been forced to change its foreign exchange hedging strategy to conserve cash. Meanwhile, shares in HFA have stopped trading while shareholders wait for the fund to liquidate itself and achieve something close to NTA.
Over at Macquarie Bank a portfolio of seven hedge funds trading under the Macquarie Equinox banner have suspended redemptions until further notice. The funds were frozen because several of the underlying component funds with the Equinox portfolios had invoked redemption gates and in some cases fully suspended redemptions.
The Macquarie Equinox problems have been exacerbated by the collapse in the Australian dollar. Currency movements forced the manager to sell assets to fund losses in currency hedges and further sales of assets skewed the funds portfolios away from targeted levels of diversification and liquidity.
As well, Macquarie Equinox was hit with a change in its financier's lending policies. Its financier terminated its loan agreement and demanded repayment by January 2009 forcing it to sell underlying hedge fund investments.
Macquarie also suspended redemptions from three Equinox trusts for the same reasons. The Equinox range of products had returns over the past year ranging from -6 per cent to -17 per cent.
Another fund of hedge funds that has been caught up in the cascading effect of underlying liquidity problems is Everest Babcock & Brown Alternative Investment Trust. EBI said in its latest monthly report that five of its underlying investment managers had restricted redemptions.
EBI said it had lodged $US400 million in redemption notices and it anticipated that a proportion of this would be received in the three months to March next year. But the manager said that a significant amount of the cash from these redemptions would be required to cash settle foreign exchange contracts caused by the collapse in the Australian dollar.
EBI, which has recorded negative returns this year of 35.53 per cent, is in the midst of a restructure which will involve the current manager, Everest Capital Investment Management, resigning by January 30 next year. Unitholders have been offered the opportunity to exchange their units in EBI for units a new unlisted trust Everest Alternative Investment Trust.
The cascading redemptions hitting fund of hedge funds is likely to continue for two to three months according to Chris Gosselin of Australian Fund Monitors. He says the scale of redemptions is greater than the demands being made by investors who want to take money out of the fund of hedge funds.Managers are lodging additional redemption requests with underlying managers to provide extra liquidity and as part of the reallocation of investments from poorly performing managers.
HFA Price at posting:
16.8¢ Sentiment: None Disclosure: Not Held
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