Hedge investors ask for lock-ups to avoid closures

Date: Wednesday, October 8, 2008
Author: Laurence Fletcher, Reuters

Hedge fund investors are increasingly demanding longer lock-ups for their money -- a move almost unheard of a few years ago -- as fears of big withdrawals start to outweigh the need to get out of badly-performing funds. While hedge fund performance has been poor this year -- Hedge Fund Research's HFRX Global Hedge Fund index fell 6.9 percent in September, its worst monthly performance on record, taking the year-to-date drop to 11.61 percent -- many investors are more worried about the survival of funds they invest in.

Many fear a rush for the exit door in underperforming funds could hurt those investors who are left by leaving them with less liquid assets, or could force funds to close and give long-term investors their money back at a time when asset prices are low.

In contrast, some investors feel that riding out the credit crisis over the next few years could generate attractive returns. "Some investors want lock-ups so other investors can't get out and destroy the business. We're seeing one-to-three years (lock-ups)," Roberto Cagnati, head of manager selection at Swiss-based Partners Group (PGHN.S: Quote, Profile, Research, Stock Buzz), told Reuters.

While barring investors from taking out part or all of their money was until recently often viewed by investors as a warning sign that a fund may be heading for closure, some investors now see such moves as necessary to prevent a closure. "We're in new territory now. Two years ago the effect on good will (of a lock-up) would have been devastating and shareholders would have withdrawn in droves," said Mark Lewis, senior investment funds partner at Cayman Islands-based law firm Walkers Global.

"(Now) it can have a slightly calming effect. It's that volatility (of assets being withdrawn quickly) that's causing some hysteria. It doesn't have the (negative) goodwill effect it did have a few years ago."

Last week investors in RAB Capital's (RAB.L: Quote, Profile, Research, Stock Buzz) flagship Special Situations strategy agreed to tie up their money for three years, even though the fund had fallen 48 percent from the start of the year to when the plan was announced last month, in return for lower fees.