Funds Clinging to Positions; Investors Encouraged to Speak Up
Hedge Fund Investors Encouraged to Push for Liquidations of Some Funds
The Wall Street Journal recently published an article discussing the growing tendency for some hedge funds to limit withrdrawal of money by investors. This practice risks permitting some managers to place improper values on the investments and continue to charge high management fees. Fund managers defend their practice of preventing investors from early withdrawal by saying that selling the positions would actually destory value of some assets for their clients because of illiquid markets. However, despite some short-term loss, investors are encouraged to push for liquidation of some funds and break through hedge fund ‘gates’, so-to-speak, to ensure an accurate reflection of their asset value and to sieze control over how their money is being handled. In the long-term, analysts believe that this move will help investors regain trust in the financial system.
The full text of the WSJ press release is reprinted below, and can also be found here.
****
Hedge-Fund Gate Bashing Yields Little
It may be time for investors to storm the hedge-fund gates.
During the market’s crisis last year, more than 15% of all hedge funds imposed restrictions on the withdrawal of money by investors. The explanation from managers: Illiquid markets for some assets meant that selling would destroy value for their clients.
But one furious rally later, only a handful of funds have disclosed concrete plans to hand back money, raising questions about whether some are actually resisting the move, perhaps to keep their firms alive.
There remain assets, such as some convertible bonds and insurance products, with limited trading. But some traders suspect that a number of hedge funds have placed improper values on some of their investments, and if they sold positions, it would force them to lower their returns.
Investors need to levy pressure on funds to sell positions and hand back cash. If not, they risk being caught in a cynical game where funds cling to positions. By not complaining, funds of funds, for example, can pretend an investment still commands a high valuation and continue to charge high management fees by telling their own clients they can’t get the money back.
There are rumblings that investors are beginning to fight back and push for liquidations. For example, Carl Icahn and other investors tried to stop Warren Lichtenstein’s Steel Partners II fund from converting into a listed investment company, demanding a liquidation of the fund instead.
It may cause some short-term pain, but as the hedge-fund industry tries to recover from a year of broken promises, dropping gates is a vital component for regaining investors’ trust.
****
Other related articles by Hedge Fund Focus include:
Leave a Comment