The casualties are mounting in the hedge fund industry where, with liquidations and redemption suspensions becoming the norm, an increasing number of investors feel they’re being slow-roasted on a financial spit fire.
For those stuck in funds that have put their gates up, the predictions of veterans such as George Soros are particularly resonant. Soros told US Congress last month that he expected the industry to shrink by about 75 per cent as a result of the combination of losses and withdrawals.
And we know that much of the time, Soros knows what he’s talking about. As Bloomberg noted, industry assets peaked at $1.9 trillion in June, according to Hedge Fund Research. And Morgan Stanley analysts estimate that amount could shrink by 45 per cent by the end of this month alone, on investment losses and withdrawals.
So why then, we might ask, was the end of year party of the Tokyo Hedge Fund Club, a very mixed group of hedge fund managers and representatives from associated support industries, packed and raging on Tuesday night?
What, between redemptions, losses and prime brokers jacking up the costs for funding and demands for collateral, we feared this event might be as cheery as a bad Japanese tankan quarterly survey on business sentiment and as exciting as a Bank of Japan policy meeting.
How wrong can you be? The turnout, at more than 260 people in the exclusive and panoramic Roppongi Hills Club, far surpassed expectations, said Stefan Nilsson, the ebullient head of the club whose day job is in prime broking and who somehow still manages to snare some of Tokyo’s glitziest venues for the Club’s regular drinks parties.
“Sure, some people are hurting. But look around you – this is the way to send the message that the industry is still here and is still vibrant”.
“Vibrant” was certainly one word to describe the Club party. Not wishing to sound sour, however, it has to be said that the high attendance might have had something to do with the wave of cancelled Christmas drinks parties among investment banks and other financial firms, as even Nilsson admitted.
It also has a lot to do with the same reason that many upscale bars and clubs around Roppongi, close to the Tokyo HQs of some of the big investment banks and hedge funds, are doing such a roaring trade in this period.
It is what more than a few Tokyo-based hedgies call the industry’s “last big hurrah”, traders, managers, brokers are packing out the more upscale bars to drown sorrows, spend some of their payouts (if they’ve been laid off) and generally try to forget the ultimate annus horribilis. At the top-end bars, it also contrasts sharply with the bleak view portrayed in a much-circulated piece in The Times recently about the “end of the Western playboy” in the lower-end ‘meat markets’ and watering holes frequented by Western financial types and the Japanese women who hunt them.
“Definitely”, said Steve, one of about four people we spoke to at the Hedge Fund Club party who is actually in the process of setting up a new hedge fund (Steve is focusing on credit, a subject he knows well). “After all, some of the best parties have been cancelled – nobody seems to be able to afford them,” he said gloomily. Credit Suisse, which was widely known for its lavish Tokyo parties, has cancelled its end of year bash, as have various other investment banks and asset managers. Almost as bad (or possibly worse) is a new trend being set by the Tokyo arms of groups such as Dresdner, which holds its annual bash Friday and is charging staff about Y5,000 ($48) to attend.
Sure, too, there was no food by the time we got there, and the wine was hardly vintage– but at least, it was plentiful. And was clearly having an effect in the absence of stomach liners. A few trays of canapés had come out early in the evening and were devoured before the waitresses could barely get out of the door, said Steve (“I only took one, I should have taken a handful”).
But back to the more serious underpinnings of all this. By Wednesday and Thursday, when people were still getting over their hangovers, we had news of the latest swag of funds to suspend withdrawals by investors, among them Fortress Investment Group (FT), DE Shaw & Co and Farallon Capital Management (Bloomberg).
They are among 80 hedge fund managers to impose restrictions on investor withdrawals in the past two months, according to Bloomberg. In the case of DE Shaw and Farallon, they happen to be among the largest to block withdrawals. What’s more DE Shaw is up about 10 per cent this year — compared with an average 16.4 per cent decline for the industry through October, according to Hedge Fund Research.
Fortress, the US-listed private equity and hedge fund group, meanwhile, has suspended redemptions at its flagship Drawbridge Global Macro Fund after investors sought to withdraw more than $3.5bn in funds, according to a regulatory filing on Wednesday.
For investors, faced with the threat that the funds would have to liquidate investments at distressed prices to raise cash, the choice is fairly bleak.
But in some cases, where funds are trying to restructure, investors are rebelling and rejecting proposals – such as at Centaurus Capital, which, as the FT reports Thursday, is running down its flagship hedge fund after investors failed to back its emergency restructuring plan and has imposed a 10 per cent limit on monthly payouts.
The failure by Centaurus to persuade half the investors to lock up their money until June, in return for lower fees, was “a surprise”, notes the FT — undoubtedly a bitter one, given that others – including the flagship funds of RAB Capital and Henderson – have won investor backing for similar proposals.
Meanwhile, others, such Jabre Capital, the Geneva convertibles specialist run by former GLG star trader Philippe Jabre, is feeling out investors on plans to phase payment of redemptions over a year.
Metage Capital, a $600m London manager, told investors this week it had frozen its two multi-strategy hedge funds ahead of a restructuring because liquidity had dried up. And other high-profile funds, including Tudor Investment Corp’s $10bn flagship, are asking investors to support restructuring. And as the FT notes, “scores” of other funds, including some from big names such as GLG, Highbridge Capital and Millennium Partners, have restricted redemptions, while dozens are shutting down.