About a decade ago, Christian Leone's Luxor Capital was one of the biggest brand names in the industry, and alongside Harbinger and DB Zwirn, every trader and analyst on Wall Street wanted to work there. Since then things have changed. According to Reuters, Luxor, which had $3.8 billion under management at last check (a steep drop from the ~$10 billion it ran several years ago) "has been losing money for months" and on Monday it surprised investors when it announced it would "not be returning exiting investors cash in full, keeping a portion locked up until some illiquid investments can be sold."
Call it the latest hedge fund "gate", only unlike some prominent debt focused names, this one is only partial: "instead of returning all exiting clients' assets in cash, investors will receive 88 percent of their money back while 12 percent of the investments will be held in a so-called special purpose vehicle, Luxor's founder, Christian Leone, wrote in a letter."
The announcement comes before a critical March 31 redemption deadline and aims to treat all investors "fairly," the letter said.
"For those investors in the Fund that have submitted withdrawal requests for March 31, 2016 and for subsequent withdrawal dates, we will transfer a pro rata share of the applicable assets into a special purpose vehicle (SPV)," Leone wrote.
Client subject to the partial gate will be those who asked to get their money out on April 1 and July 1 and as a result; instead of getting all cash they will see a portion of their money put into the SPV and the fund will not charge any fees on these assets.
As Reuters reminds us (for those who have forgotten the gating junk bond funds of late 2015), "special purpose vehicles and side pockets are permitted at hedge funds but they are often viewed as a last resort that sour investors, and they have not been widely used since the 2008 financial crisis when many hedge funds posted heavy losses. But consultants have said that if illiquid positions become large, then it is prudent to segregate them and not charge fees until gains are realized."
More form Reuters:
After sending the letter, Leone held a brief conference call with investors where he identified the four illiquid securities being put into the special purpose vehicle. Together they make up 12 percent of the portfolio, he said.
They include food delivery service Delivery Hero, which Leone said makes up more than half of the exposure and has seen a "multifold appreciation since we initially made the investment." Additionally private equity investments in online food ordering service Foodpanda and drilling company Ascent Resources are in the SPV as well as preferred stock of Altisource Asset Management.
And while we are happy that these investments appear to have appreciated, they are rather useless if they are completely illiquid.
Leone told investors that clients have redeemed roughly 10 percent of their money in the first quarter and that redemptions requests are expected to be similar in the second quarter.
Last year, the fund saw investors redeem roughly 8 percent of their money from Luxor, a number that is roughly in line with what investors have done every year.
This year it is taking preemptive measures against what it knows will be even more redemptions and gating in advance.
As noted above, Luxor had been a popular fund in the hedge fund industry, gaining recommendations from such influential industry consultants as Cliffwater LLC, which advises on $56 billion in alternative assets invested by public and private pension funds as well as endowments and other big investors. But in 2015 it lost 19.2 percent when the average fund lost about 1 percent and it started 2016 with a 5.2 percent loss in January. This unnerved some clients, including Rhode Island's state pension fund, which gave Luxor $50 million to invest in 2014, to exit. Last week its investment committee voted to pull its money out at the end of June and the fund told Reuters that it expected to receive $35 million back.
Luxor did not say when it expects to return the rest, saying only "We will continue to actively manage the assets held by the SPV until we can liquidate them in an orderly manner."