LONDON (Reuters) - Hedge funds under pressure from a combination of tightening credit lines, illiquid investments and investor redemptions are increasingly moving to stem investor outflows, industry experts told Reuters on Thursday.
By Laurence Fletcher
LONDON (Reuters) - Hedge funds under pressure from a combination of tightening credit lines, illiquid investments and investor redemptions are increasingly moving to stem investor outflows, industry experts told Reuters on Thursday.
An increasing number of funds are using gates -- which can typically limit investor exits to between 10 and 25 percent of assets per quarter. Alternatively they are suspending investor redemptions entirely so the managers don't have to undertake a fire sale of assets in difficult markets to pay exiting investors.
"We see a lot of situations that aren't total write-offs but where it's more a question of suspending dealing or a gate," said one fund of hedge funds manager, who declined to be named. "These situations are increasing."
!ADVERTISEMENT!Prime brokers -- who provide services such as financing for trading and settlement of trades -- have become increasingly concerned in recent months about funds, particularly in the credit area, who may be leveraged, have suffered large losses or are holding illiquid investments.
Last week London-based hedge fund firm Peloton Partners told investors it was liquidating its $2 billion ABS Fund after some 14 lender banks pulled back on credit. In a letter to investors it blamed its lenders for "severe" markdowns in the value of its assets.
On Thursday Carlyle Capital Corporation <CARC.AS>, an affiliate of private equity firm Carlyle Group <CYL.UL>, said it had received margin calls totaling more than $37 million from seven financing parties and was unable to meet the demands for extra collateral to cover its market positions for four of them.
"We do see a lot of funds that are seeing problems," the fund of funds manager said.
"It's a combination of three things -- credit lines being reduced or pulled ... illiquidity in the underlying market ... and redemptions from clients, which are accelerating due to what's going on. I have a feeling redemptions are increasing in the industry."
Smaller funds, which may be viewed as less lucrative business by some prime brokers and a less safe bet in tough market conditions by some institutional funds, may be particularly feeling the pressures and having to stem flows.
"From what I've seen, some funds have gated, and the smaller less liquid funds may be more susceptible to these pressures due largely to less favorable provisions with their counterparties and more concentrated investor bases," said Odi Lahav, head of Moody's European Alternative Investment Group.
Strategies imposing bars on investor exits included those investing in credit, leveraged loans and some long-short equity funds in less liquid areas such as mid and small-caps, the fund of funds manager said.
(Editing by Elaine Hardcastle)
