Prominent Hedge Fund Luxor Capital Warns Redeeming Investors Will Be "Gated" After Sharp Losses

Tyler Durden's picture

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."

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redd_green's picture

Leone will have to trade down his private island for a slightly smaller one.   Poor bastard.

 

The big question: WTF is Rhode Island state pension fund doing putting money into a crooked hedge fund?    Is the Rhode Island legislature brain dead?  OK Never mind. 

NoDebt's picture

We illiquefied some folks.

AlaricBalth's picture

 --  It's a good time to be in an illiquid investment in the residential housing sector. Can you say...BOOM (again).

 

"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."

 

From the Altisource 10-K (Symbol: AAMC) "Altisource Asset Management's primary client currently is Altisource Residential Corporation (“Residential”), a public real estate investment trust (“REIT”) focused on acquiring and managing quality, affordable single-family rental properties for working class families throughout the United States. Residential is currently their primary source of revenue and will drive our results."

 

Existing Home Sales Crash Most In 6 Years: NAR Blames Slowing Economy, Bubbly Home Prices

http://www.zerohedge.com/news/2016-03-21/existing-home-sales-crash-most-...

 

JRobby's picture

He seemed so good looking and charming in the picture?

Sam Clemons's picture

When will someone do something to these crooks?  Tick Tock.  Do people not get mad anymore?

Dr. Spin's picture

Goood morning Redd,

I just love it when people answer their own questions.  Makes life much easier for me...

;-D  

Debtpool's picture

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.

Does no one know how to type or construct a coherent sentence?

quadraspleen's picture

Judging by what he said, he'll be keeping his current island but charging his marks *cough* sorry, clients, 12pc toward his costs..you can bet he wasn't sharing his "investments" with the people whose money he's keeping on ice

ZH Snob's picture

but just think, you get to be cheated by an exclusive club of thieves.

now that's status.

 

redd_green's picture

Bingo, oh man, words of wisdom.    I looked at so bloody many hedge funds with terrible returns, either wild fluctuations followed by huge draw downs, and wondered why the hell anyone with money would put a dime in.    You nailed it:  they just get some kind of status symbol out of being screwed  by the guy with a private jet and private island. 

stinkhammer's picture

...and it's gone. This line is for customers only.

Calculus99's picture

Yet another Hedge Fund turns into the Hotel California, you can check your cash in, not out.

Question.

What's the difference between a 'super food' like some small berry not many have heard about and hedge funds?

Nothing.

They both rely on 'super marketing'.

Or to put it another way, you're all being PLAYED. Sure, there are some exceptions to the rule but not many.

arby63's picture

Quick, I need some Texas Super Food, Dollar Shave Club and a hedge fund before noon!

Global Hunter's picture

The good news is that I have a $100 bid, the bad news is that is only for 1 share and after that there are no other bids at this time.

redd_green's picture

Heh, sometimes Im glad I don't have the dough to play these games:


http://www.symmetric.io/hedge-fund/LUXOR-CAPITAL-GROUP-RATING.html

 

 

TheytookERjobs's picture

I love dominos fallling 

Grandad Grumps's picture

So, presumably, as with bank management and public company management, Leone has taken care of his own wealth and is now leaving his customers to takea all of the losses.

Does anyone else see a problem with the current corrupt system and current herd of corrupt executives and managers?

JailBanksters's picture

Is this sign of good things to come with hedge funds getting their funds clipped. It's like one after another

 

 

Arnold's picture

They (hedges) are where you old age pension has gone to die.

Latitude25's picture

Slowly but surely but too late the sheeple will realize that return of (not on) capital is important.

Dragon HAwk's picture

SO Gating is not a good thing?

 as in Putting a padlock on a gated community fence and seeing how long it take those rich morons to find somebody who knows how to use a hack saw or tourch ?

Consuelo's picture

~Perfect~ analogy.

 

+1,000,000

Farmer Joe in Brooklyn's picture

This is just the beginning.

There is NO liquidity in the bond market.  When the next wave hits and redemptions start picking up, there will be plenty more funds "gating" their clients. 

There just isn't enough liquidity to accommodate even a fraction of the market when the mood sours.

There's a reason they have multiple exit doors in a movie theater.

Tick tock, tick tock....

Arnold's picture

Some one mentioned Rhode Island above.

This memory would be appropriate.

 

http://ultimateclassicrock.com/great-white-concert-fire/

RiverRoad's picture

So is his money gated too or did he get himself out first?  Or did he ever have his own money in the thing?  When will supposedly smart, rich people stop handing their money off for somebody else to run?  Better kiss it goodbye baby when you do that.

Brokenarrow's picture

without exception, these clowns mark their positions to make believe. when they ant sell they gate. it i sthe swindle of the century. they do collect a performance fee based on unrealized capital gasins that dont exost.

Rip van Wrinkle's picture

Isn't this exactly what happened to BNP in 2007?

Kina's picture

Another Roach hotel.

VW Nerd's picture

Aaaand it's gone!  Next please....

Lost in translation's picture

Buy M1As.

Practice.

A lot.

Because it's coming...

Seasmoke's picture

Rhode Island public takers pension Ponzi is dead. They just don't know it yet. 

overmedicatedundersexed's picture

bond market you say..well yenta yellen is there to suck em up,, the sponge of bonds called the FED..looks like a Tick after a good meal.

the FED is the bond market, or have you not been paying attention?

RiverRoad's picture

The Fed is running their own annuity and their shareholders collect 6% off our taxes every year plus other bennies.  Nice deal.

two hoots's picture

Gated:    Many fail to realize the Money Market Funds can also be gated:

From our very own:  ZH   http://www.zerohedge.com/news/2014-07-23/gates-are-closing-sec-votes-thr...

 

"money market fund managers will have the option to 'suspend redemptions to allow for the orderly liquidation of fund assets" or in other words implement redemption "gates."

"the SEC adopted new rules designed to curb the risk of investor runs on money market funds, capping the end of a years-long heated debate between regulators and the industry dating to the financial crisis according to Reuters. " 

RiverRoad's picture

I've also read that the SEC quietly approved rules/regulations for fund companies that will allow them to use monies from one fund to make payouts for redemptions in another fund.  If the shit hits the fan, this could get wild.

EdSav's picture

I've been waiting for this one to close. Easily one of the dumbest HFs out there. The targeting short squeezing of AAMC was a demonstration in the only thing these manipu-muppets do well.. which is of course piling into one illiquid stock and performing a syndicated short-squeeze. AAMC was such a terrific piece of trash to watch rise (and fall) like Icarus.. 

cbaba's picture

I am not surprised, those so called investors jumped into Hedge Funds, poured all their money, all stocks went up since March 2009 when Dow was at lowest, now some of their shares are worthless, when they start to pull more money in future, they will loose much more..

Those suckers deserve this. If they had invested in gold/silver, they would get their capital back with a hefty profit.

 

buzzsaw99's picture

mostly taxpayer money, meh. there's always moar where that came from. rhode island deserves whatever screwing they get.

BiPolarFrenchman's picture

Let's make this death as slow as possible. Financial death by Chinese water torture.

Michigander's picture

"Gated" is the new "Fucked"

Consuelo's picture

Speaking of getting Fucked, is he the husband of Sunny Leone...?

 

Just asking...

 

 

Plaza de palma's picture

Redd_Green asks an interesting question...

 

The big question: WTF is Rhode Island state pension fund doing putting money into a crooked hedge fund?    Is the Rhode Island legislature brain dead?  OK Never mind. 

 

Basically you nailed it, the entire state government of Rhode Island has been sprinting towards the abyss for a while.  Former state Treasurer and current governor Gina Raimondo has been a very useful stooge for her bankster allies, funneling state pension funds and other public trusts into high fee, underperforming hedge funds since her rise in state politics.  They labeled it pension reform, because sheeple loves them some reforms.  If only they knew the fees they would pay to do business with a bunch of jerks who can't match S&P index returns, but charge fees as though they'd quadrupled them.

 

Happening with state pensions and those of large cities all over the place.  Another reason that bankers will be lined up against the wall right next to the politicians and lobbyists once herd gets startled again and begins to stampede.

Northern Lights's picture

I worked as a hedge fund accountant for over 7 years for a well known hedge fund accounting company.  What's going on with regards to Luxor Capital not paying out redemption in full is typical in the industy.  Typically, hedge funds will do what's called a "holdback" on redemptions and it's typically 30% of the investors total monies held in the fund who's value is based on prior period NAV.  Typically, the fund holds back this amount for 6 months after the full redemption occurs, and then it gets paid out.  I believe what would be a story here is if Luxor Capital said they will NOT allow any investors to redeem because by doing so would be detrimental to the survival of the fund.  Can they do that?  Yes, they can if it was written into the prospectus to the investors of the fund.  I've read these prospectus as we had to keep them on file for audit purposes.  Most are so convoluted, you're pretty much at the mercy of the fund manager.  When someone offers you the chance or 10% ROR on your investment, I guess you'll sign anything.  Over my years at that accounting company I saw plenty of funds crash.  All of them were heavy losses well into billions of dollars.  The hedge fund industry is hurting big time.  Over the past 4 years, I saw more hedge funds either leave or die than those that were new business to the company. Something else that is really fucked up, is that most of the assets in these funds are exotics.  No one knows how the fuck these fund managers are pricing them.  I had to redo my monthly reporting no more than 3 times for one month because the fund manager kept revising the pricing of one of these assets.  That same asset was also hard for the fund manager to liquidate which to me indicated it was pretty much worthless and should have been written off as a loss months ago.