Investors in Drake Management’s three hedge funds face a tough decision after the $12bn New York manager warned it was considering liquidating the funds.
Do they think Anthony Faillace, the much-feted former Pimco manager, is a genius caught out by irrational markets, or a stubborn gambler who wouldn’t close out failed trades?
The future of the firm depends on the answer. On Wednesday Mr Faillace and co-founder and president Steve Luttrell wrote to investors with a ballot form asking them whether they were willing to keep money in Drake hedge funds, with options being to shut down the funds, split them into surviving and run-off vehicles, or keep the status quo.
Either way, there is no doubt Drake called the market wrong. Its hedge funds bet on growth moderating, rather than a credit crunch and a bear market, and are stuck with assets they cannot easily sell into illiquid markets.
Still, Drake has met all margin calls from lenders, unlike many of the disasters this year, such as Peloton. Its crisis is caused by about half its investors demanding their money back, which would require it to sell positions at firesale prices - and big losses - if it agreed.
(GO Capital Asset Management, a Dutch hedge fund manager, told investors yesterday it was suspending redemptions in its €560m equity long/short hedge fund until the end of the year for the same reason, to prevent forced sales of big and illiquid holdings in Benelux and German small-cap companies.)
Drake’s explanation, from its letter, of its problems:
The Existing Funds find themselves in their current position due to a combination of sharply negative performance and the extreme volatility and illiquidity of certain capital markets over the last six months.Performance turned negative in the second half of last year, prompting Drake to suspend withdrawals after an appeal to investors for them not to withdraw fell on deaf ears. In 2007 it lost 24.55 per cent in the A1 share class of its Global Opportunities, investors said, giving back much of the 42.24 per cent gain of the previous year. Add in this year’s loss - 4.79 per cent by the end of February, and more this month, according to investors - and it is easy to see why half the investors have given up hope.
“All we want is our money back” was the plaintive cry from one investor yesterday.
Still, if Mr Faillace can persuade the other half to stick with him, all he has to do is make his trades pay off and he’ll still have a decent business, particularly with the $8bn or so of long-only funds he runs.
Drake’s positive spin, from its letter - although it looks like the lawyers got to it.
All investors should be aware that Drake’s principals and executives at this time remain fully committed to Drake. We are committed to developing and implementing a key employee/specialist retention plan to assure our continued stability and we look forward to the opportunity to continue to serve you.
We are confident in our team and continue to remain optimistic about the long-term prospects for the Existing Funds’ investment program. However, all investors need to understand that Drake cannot assure you that the solution we implement will lead to a successful result for investors.
