Paulson Criticizes Hedge-Fund Managers for Limiting Withdrawals

Date: Wednesday, December 31, 2008
Author: Katherine Burton, Bloomberg

John Paulson, who runs the $36 billion hedge-fund firm Paulson & Co., has some harsh words for his peers and their tendency this year to block or curb clients’ attempts to get their money back.

“We think it’s a mistake for managers to use gates and other tools to limit investor access to their funds,” Paulson wrote in a 2009 outlook to investors. “While we recognize the difficulties of the current environment, we think it is a manager’s responsibility to raise liquidity to meet the redemption needs of their investors.”

Paulson, 53, can make his case for client-friendly policies because he made money for investors this year. His largest fund, the $13 billion Paulson Advantage Plus has climbed about 38 percent through Dec. 19, according to the undated report, making it the best performer among multibillion-dollar funds.

Most hedge-fund managers have had a tougher year than Paulson. On average, these private partnerships tumbled 18 percent through November, according to data compiled by Chicago-based Hedge Fund Research Inc. Industry assets could shrink as much as $800 billion from their June 30 peak, starting 2009 with about $1.1 trillion, according to estimates by Morgan Stanley.

That’s caused some managers to try to hold on to client capital. As of October, 18 percent of hedge-fund assets --managed by 5 percent of hedge funds -- were subject to some sort of restriction on withdrawals, according to Peter Douglas, principal of Singapore-based hedge-fund consulting firm GFIA Pte.

Raising Cash

In his letter, Paulson criticized his fellow managers, saying there have been plenty of opportunities to raise cash.

“Even in opaque areas of the markets such as in bank debt, mortgage-backed securities and other distressed securities, we see hundreds of millions of dollars trading every day,” he wrote.

Paulson was “especially surprised” by managers who restricted withdrawals in cases when the requests accounted for a quarter or less of assets under management, and where “the managers have the cash and one of the stated reasons for restricting withdrawals is so the manager can continue to invest in new opportunities,” he wrote.

Armel Leslie, a spokesman for Paulson, declined to comment.

Managers who have suspended or restricted redemptions include Ken Griffin’s Citadel Investment Group LLC. The firm’s two main funds manage about $10 billion in assets and got $1.2 billion in redemption requests. D.E. Shaw & Co. LP, the investment firm run by David Shaw, limited withdrawals after it received redemption requests of more than 8 percent of assets.

Distressed Debt

Paulson said that while he’s bearish on the overall economy, he is looking to buy distressed mortgages and distressed debt, and is interested in investing in debt restructurings, bankruptcies, strategic mergers and financial recoveries.

New York-based Paulson, along with J.C. Flowers & Co. and Dune Capital Management, is one of the three firms leading an effort to buy failed lender IndyMac Bank, according to three people with knowledge of the situation.

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets, bet on falling as well as rising asset prices and participate substantially in profits from money invested.

To contact the reporters on this story: Katherine Burton in New York at kburton@bloomberg.net