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As Redemptions Surge, The Dreaded Hedge Fund "Gate" Is Back

Tyler Durden's picture





 

Hedge Fund "gating", or the forced administrative limit on how much money hedge fund investors can redeem at any given moment, is one of those bad memories that most wish could remain dead and buried with the peak of the credit crisis, when virtually every hedge fund was swamped with redemption requests as impatient LPs couldn't wait to get what was left of their money back. However, the problem for hedge funds, in addition to underperforming the market substantially for a 5th year in a row, with almost all hedge funds now returning far less than the broader market (which continues to successfully defend the 1400 barrier every day) especially after October when the two biggest hedge fund darling stocks GOOG and AAPL finally reincountered gravity, is that their LPs have once again gotten restless and are now again actively seeking their money back from underperformers. Sadly, it was thus only a matter of time before the "gates" returned. As of this weekend they have.

The WSJ reported that after 3 years of smooth operations, the first hedge fund to reimpose gates on its investors, Salient Partners, a $3.8 billion Texas-based Fund of Funds, has just "gated" redemptions. It is the first, it will certainly not be the last as we expect news of many more gates to trickle into broader circulation.

From the WSJ:

Salient Partners LP said it was halting withdrawals from its $3.8 billion investment fund, telling investors that more money was pulled from the firm than came into it during "the past several quarters."

How much money was pulled? According to FinAlternatives a whopping $1 billion, or over a quarter of total assets, was requested back.

Rather than let investors redeem fully from its Endowment Fund, Salient said clients would get back 5% of their money during the first quarter of 2013, according to a letter the Houston-based firm sent to investors Friday. Those who want to keep their money in the fund may be able to reinvest it, Salient wrote.

 

Major additional withdrawals "at this time would be incompatible with managing the Fund in accordance with its stated objectives, given the composition of the Fund's underlying portfolio investments and investment horizon," the letter said. Redemptions will be suspended for the rest of the year, Salient wrote.

 

The Endowment Fund's board will decide whether to continue giving back to investors a fixed amount of money in future quarters or allow withdrawals to resume, Salient's letter said.

 

The move affects the fund's more than 17,000 investors, who were pitched an investment model similar to that used by universities, as referenced in the fund's name. The Endowment Fund invests across asset classes including stocks, private equity, real estate, natural resources and hedge funds, according to information sent to investors in September.

What is less obvious is that Salient was actually not losing money YTD: "Through August, the fund had gained 1.7% net of fees and expenses, compared to 13.5% by the Standard & Poor's 500-stock index, according to the September investor update."

In other words, even merely generating a return is no longer sufficient for most LPs who have gotten tired of paying 2 and 20 to managers who year after year continue to underperform the broader market, a shift in psychology we have warned about many times in the past - the historical thinking was that hedge funds are merely supposed to beat their benchmark: this is no longer the case.

And finally, with FoFs always hit first, who then have to decide which underlying hedge fund they get to pull money from, it simply means that the delayed aftereffect of the redemption surge forced even more hedge funds to chase high beta, and winning stocks, which sadly collapsed in October.

We, for one, can't wait to see how many other hedge funds are forced to gate their LPs at a time when the S&P is close to its 2012 highs, and not that far off from its all time highs...

 


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Thu, 11/01/2012 - 11:19 | Link to Comment Ivanovich
Ivanovich's picture

Return OF Capital trumps Return On Capital. 

Thu, 11/01/2012 - 11:26 | Link to Comment youngman
youngman's picture

Not if you are a Pension fund..

Thu, 11/01/2012 - 12:00 | Link to Comment francis_sawyer
francis_sawyer's picture

Roach Motels... Your money checks in but it doesn't check out... [Sorry Rainman ~ I missed your comment ~ anyway, same idea]...

Thu, 11/01/2012 - 12:46 | Link to Comment strannick
strannick's picture

Goodbye parasitical HedgeFunds, buy gold. Be your own central bank. The big shiny returns 20% a year, requires no fee payment, plus provides financial cataclysm insurance

Thu, 11/01/2012 - 12:52 | Link to Comment Half_A_Billion_...
Half_A_Billion_Hollow_Points's picture

Gold's good, but they're holding its value.  

 

Fuck the dollar, fuck bernanke, fuck TBTF; bitcoin is up 100%+; litecoin is up 1000%+ this year.  And FUCK HEDGE FUND GATES too.

Thu, 11/01/2012 - 11:33 | Link to Comment slaughterer
slaughterer's picture

Gates are bullish.

Thu, 11/01/2012 - 13:08 | Link to Comment Stock Tips Inve...
Stock Tips Investment's picture

The stock market has its own dynamics. Currently, the central bank intervention has created major distortions. But the market is not dead and will show signs of life at any time. In these circumstances, investors will return to seek to hedge funds. Make no mistake.!

Thu, 11/01/2012 - 14:17 | Link to Comment mac768
mac768's picture

IF things like this happen, then we are just a LITTLE bit away

from the real CRASH...

Thu, 11/01/2012 - 11:20 | Link to Comment Rathmullan
Rathmullan's picture

muppets get what muppets deserve.

Thu, 11/01/2012 - 11:21 | Link to Comment BandGap
BandGap's picture

Wasn't this the biggest contributing factor to the drop before and after Lehman? I do remember the bitching of those that stayed with the hedge funds (prior to the collapse) having to watch their assholes get torn out. When people want out, they want out.

You have to have nerves of steel or brains of oatmeal to play these days.

 

Thu, 11/01/2012 - 11:22 | Link to Comment morning_glory
morning_glory's picture

Have to keep the sheep penned in for their own safety. Otherwise the foxes will get'em!

Thu, 11/01/2012 - 11:22 | Link to Comment Rainman
Rainman's picture

Check out any time you like, but you can never leave.

Thu, 11/01/2012 - 11:29 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

Most people don't realize that your average retail mutual fund can also enact a "gate". Read the prospectus. Nearly all state very clearly that under certain conditions (including panic selling by shareholders) they can refuse redemptions for up to six months.

Oops!

This allows the fund manager(s) and crew to polish their resumes and find other gainful employment on your 12b-1/management fees.

Thu, 11/01/2012 - 11:29 | Link to Comment BandGap
BandGap's picture

I did not realize this. Thank you. Not that I can do much about it, but at least I won't be shocked to learn the truth.

I am looking at portable generators and Glocks this week.

Thu, 11/01/2012 - 11:31 | Link to Comment NotApplicable
NotApplicable's picture

Get the Glock first. It'll make any generators even more portable.

Thu, 11/01/2012 - 12:00 | Link to Comment MachoMan
MachoMan's picture

Why glock?  Are you worried about manual safeties or something?  Shitty triggers?

There are plenty of guns out there that will go bang each time you pull the trigger...  some considerably cheaper than a glock...  or, alternatively, if you want a gun that does a whole lot of things well, you can pay a few hundred more and step into the HK, Sig, etc.

Also, why a handgun?  Are you going to be carrying it on your person every day?  If not, I'd suggest some alternatives...  shotgun for home defense for threats inside the house...  AK for everything else.

Thu, 11/01/2012 - 23:53 | Link to Comment MachoMan
MachoMan's picture

Yep.  Good quality products.  Will probably move to the 938 for certain carry situations.

Thu, 11/01/2012 - 12:41 | Link to Comment BandGap
BandGap's picture

I have a Smith & Wesson 9mm and a Taurus Tracker .357. The Glock is for my wife, nothing says home safety like 17 rounds. We also own several rifles and shotguns and are working out the kinks with this -

http://www.hi-pointfirearms.com/carbines/carbines_9mm.html

It is surprising well made and accurate. I think we have things covered.

Thu, 11/01/2012 - 15:08 | Link to Comment Col_Sanders
Col_Sanders's picture

My opinion and ten bucks will get you a Happy Meal at Mickey D's, but I have an older Hi-Point 9 pistol and it kicks ass.  I have put countless rounds through it and it's as accurate and as well-made as the 1911s and Barettas I used in the Navy.  Easy to clean, never jams - just a really good gun - Especially when you consider I only paid $80 for it.

 

Thu, 11/01/2012 - 17:18 | Link to Comment blunderdog
blunderdog's picture

There's a lot to be said for experience.  Why not a '40s manufacture Browning Hi-Power? 

They were killing people pretty well a lifetime before many of us were born.

Thu, 11/01/2012 - 20:38 | Link to Comment hairball48
hairball48's picture

Short barrel, pump action shotguns rule :)

Thu, 11/01/2012 - 11:37 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

BTW this also includes bond mutual funds as well as those so-called "safe" money market funds with a constant $1 NAV. They can all be gated.

MF's know that doing so means death to that fund and even the fund company. So the gate would most likely be dropped as part of an industry wide gating. I am also certain that the MF industry will beg the government to force them to gate so that they can blame someone else....in this case the "authorities".

<Don't blame me for keeping your money. The government made me do it.>

Thu, 11/01/2012 - 11:39 | Link to Comment Dr. Engali
Dr. Engali's picture

CD that is how they are going to lock everything down for when they make the play for people's 401ks and retirement plans.

Thu, 11/01/2012 - 11:49 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

I agree.

<Thank you for "voluntarily" investing your 401k/IRA in US Treasury Bonds, Bills and Notes. Now shut the fuck up and eat your peas.>

Thu, 11/01/2012 - 12:03 | Link to Comment MachoMan
MachoMan's picture

and why I took all my money (not much) the fuck out of there...  uncle sam can have the penalty...  I'm "happy" with the remainder.

Thu, 11/01/2012 - 11:40 | Link to Comment NotApplicable
NotApplicable's picture

It's hilarious to think that my MM fund is being held hostage for a whole basis point.

Thu, 11/01/2012 - 11:30 | Link to Comment Cdad
Cdad's picture

It is just amazing, brother Cog.  Ben Bernanke is pouring trillions of dollars into the system, and yet the dreaded gate has to be raised to keep cash in.  Just ridiculous.  Until these firms are ALL gone, there just cannot be a recovery or return to normalcy.  Maybe Ben will finally, finally get it.

Thu, 11/01/2012 - 16:38 | Link to Comment Dr Benway
Dr Benway's picture

Well having inflated assets works great when you have inflows of suckers, yielding instant profits, but conversely works terribly when you have a net outflow of suckers. The funds can't actually sell their inflated assets at book value, hence the need for gates.

Thu, 11/01/2012 - 11:24 | Link to Comment Dr. Engali
Dr. Engali's picture

5% of their money back in a quarter? That's screwed up, it's even worse than a bank holiday. It just goes to show if you can't touch it you don't own it.

Thu, 11/01/2012 - 11:29 | Link to Comment NotApplicable
NotApplicable's picture

"Let me tell you how it will be.

There's one for you, nineteen for me."

Thu, 11/01/2012 - 12:10 | Link to Comment helping_friendl...
helping_friendly_book's picture

ashes, ashes all fall down

as the pinstripe roll the dice

guess who gets to pay the price?

Thu, 11/01/2012 - 11:55 | Link to Comment drink or die
drink or die's picture

I hear if you loan your wife out to them for a night they will give you 6% back a quarter.

Thu, 11/01/2012 - 11:28 | Link to Comment youngman
youngman's picture

I think you will see this at the COMEX soon....and the London Metals Market

Thu, 11/01/2012 - 11:31 | Link to Comment BandGap
BandGap's picture

No shit, all that paper gold and silver.......

Thu, 11/01/2012 - 11:29 | Link to Comment HD
HD's picture

I'd love to read that letter:

  Dear investor,

       Even though the market is soaring on an ocean of free fed money we can't seem to get our shit together. As a courtesy to you, we are keeping your money locked in our fund until the stars align just right or Steve Jobs returns from the dead to launch a new iThing.

Don't stop believein'

2 and 20 24/7 y'all. PEACE

 

Thu, 11/01/2012 - 18:16 | Link to Comment Lore
Lore's picture

"Salient said clients would get back 5% of their money during the first quarter of 2013....[Major additional withdrawals] at this time would be incompatible with managing the Fund in accordance with its stated objectives, given the composition of the Fund's underlying portfolio investments and investment horizon."

So help me God, if somebody tried that with my family's money, I don't know what I'd do.

GET THE MESSAGE, AMERICA!

Thu, 11/01/2012 - 11:34 | Link to Comment Mercury
Mercury's picture

FoFs will then end up pulling money from funds where they can not from ones they would like too.


You would think that given what happened in 2008, LPs would be more wary about giving their money to GPs who can suddenly change the rules like that.

Thu, 11/01/2012 - 11:32 | Link to Comment Silver Garbage Man
Silver Garbage Man's picture

And another reason to hold physical gold and silver.
I don't have to kiss anybody's ass to access MY money.
I might have to ask a chipmunk or squirrel to get out of my way, but that's it. Just wait till the bank runs start for real. It will be fun to watch

Thu, 11/01/2012 - 11:43 | Link to Comment youngman
youngman's picture

I have gone long SCUBA gear....as all you guys that had those terrible accidents where all your gold and silver sank in a boating accident...well..you wlll need it...get Jennifer Beals to help you out ...she looks good underwater blowing bubbles

Thu, 11/01/2012 - 11:33 | Link to Comment Tinky
Tinky's picture

This really is remarkable, and the last sentence of the post sums up why everyone – though especially those with money in such funds – should be worried:

We, for one, can't wait to see how many other hedge funds are forced to gate their LPs at a time when the S&P is close to its 2012 highs, and not that far off from its all time highs...

 

Thu, 11/01/2012 - 11:49 | Link to Comment sasebo
sasebo's picture

Fuck all those delusional assholes  -- AU & AG are your best friends. 

Thu, 11/01/2012 - 11:52 | Link to Comment Liquid Courage
Liquid Courage's picture

Lobster Trap.

 

Are you smarter than a bottom-feeding, shit-sucking, micro-cephalic crustacean? Are you sure? Then you may be an "investor"!

Thu, 11/01/2012 - 12:04 | Link to Comment Marco
Marco's picture

The rich have once again started eating themselves ... pretty soon all the 1%'ers will learn what everone else already has, if you are not at the absolute top you're the fish.

Thu, 11/01/2012 - 13:12 | Link to Comment rosiescenario
rosiescenario's picture

Off topic, but just wondering how Sandy may impact the muni bond market along the East Coast????

 

Perhaps the major reduction in property values (as in, I used to have a house and a lot, now there's just a lot) reducing the tax base may put quite a few muni's at risk?

Thu, 11/01/2012 - 13:28 | Link to Comment percolator
percolator's picture

"Salient Partners LP said it was halting withdrawals from its $3.8 billion investment fund, telling investors that more money was pulled from the firm than came into it"


Sounds like a Ponzi scheme to me.

Thu, 11/01/2012 - 18:42 | Link to Comment swissaustrian
swissaustrian's picture

CTAs (managed futures) are the only real "hedge" funds

 

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