Hedge Fund Restructuring of 2009 cont..

Against the background that hedge funds have generally outperformed both the equity and debt markets year to date, it is a little surprising that confidence in the asset class is at such a low ebb. Perhaps some of this can be laid at the door of many political commentators and media of so called experts who seek to wrongly portray hedge fund managers and industry as responsible for much of the ills of the financial world, but certainly the damage of being caught on the wrong side of the Porsche-Volkswagen bear squeeze, the implications of Petters, Madoff, poor performance and or decisions by a limited number of people has done nothing to enhance the confidence of investors in troubled markets.
The reality of this lack of confidence is that the initial trickle of redemptions has not so much turned into a gush, but rather the dam seems to have been well and truly breached (Q3 net outflows of $31.7 billion against $1,722 billion assets under management according to the HFR Global Hedge Fund Industry report – but with outflows expected to be substantially higher in Q4 and things not looking good for Q1). An increasing number of hedge funds are struggling to meet liquidity needs by selling assets at distressed prices which risks becoming a downward spiral of falling NAVs triggering more redemptions, which in turn force sales at even more depressed levels. In essence, the major issue faced by the majority of funds is one of timing. If funds had the luxury of holding investments for an extended period, in the way private equity funds do, they would have much greater flexibility to value their investments other than on a potentially forced realization basis. It is for his reason that, in an attempt to pull out of the tailspin in which they find themselves, a number of funds have resorted to various mechanisms that address accelerated redemptions and illiquid assets in their portfolios which include managers suspending redemptions enacting gates, side pockets, staged redemptions, shareholder consents, fee concessions etc.
With confusion in the marketplace as to what are acceptable fair value levels for illiquid investments, hedge fund managers need to be providing investors with full disclosure and information allowing them to take financial decisions in the fast moving market in which we live. The right answer for a particular fund will inevitably depend on the existing bye-laws of the fund and the detailed management agreement provisions; the identity and concentration of the end investors and the fund’s relationship with those investors.