To buy time and stave off losses, more funds are blocking withdrawals. Are they just postponing the inevitable? There's a chill spreading across the hedge fund industry.
With more portfolios falling victim to the credit crunch, managers by the dozen are freezing investor redemptions, preventing a mad rush to the exits that would force funds to sell beaten-down assets to raise cash. But is this unprecedented move just postponing the day of reckoning for funds and the market?
Since November
at least 24 hedge funds have barred or limited investors from taking their money out, tying up tens of billions of dollars for an indefinite period. ... Some hedge funds have broad powers under their contracts with investors to make such changes at their discretion.
"It's the largest period of redemption suspensions in the industry's history," says Jonathan Kanterman, a managing director with Stillwater Capital Partners, a money manager.
It's understandable why hedge funds would want to keep investors from pulling out their money en masse. In this market, any sales would almost certainly be at cut-rate prices, guaranteeing big losses in portfolios. And once managers start dumping assets,
there's also the danger that big banks, which provided the funds with credit lines to amp up returns through what's known as leverage, will demand their money back as collateral shrinks. Those margin calls would prompt further sales, setting off a vicious cycle that could ensure a fund's demise.
"If you are an investor, you are upset," says one well-heeled investor in a fund that has stopped redemptions. "But if every fund has to sell at once, it's terrible."
Business Week
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