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

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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