Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.
Mutual-fund investors are impatient, quick to yank money from funds that perform poorly. That’s the common perception, anyway.
But it turns out that hedge-fund investors are similarly impatient, even though they're often thought of as bigger institutions that make more measured long-term decisions.
The latest example is Golub Capital’s decision to shut down a $150 million credit hedge fund that invested in distressed debt, according to a Bloomberg News article on Monday by Sridhar Natarajan and Carol Ko. The fund lost more than 20 percent last year, which is significant but less than the average 38 percent plunge in dollar-denominated distressed bonds in 2015.
Daniel Posner, who led the fund, could have blamed market conditions or persistently low oil prices that have wiped out billions of dollars of value from energy-related debt. Instead, he seemed to focus on the fact that investors wanted out at a bad time.
There's “a fundamental mismatch between the liquidity that hedge-fund investors expect and the illiquidity of the underlying investment assets,” Posner wrote in an e-mail statement to the Bloomberg reporters. "We concluded that it was in the best interests of our investors to close the fund given the limitations on what we could provide within the fund’s structure."
In other words, it appears the hedge fund's investors were angling for their money back, but the manager found it increasingly difficult to sell the underlying assets without realizing huge losses.
Hedge funds are supposed to be somewhat protected from such liquidity mismatches, given their longer lockup periods, quarterly redemptions and other safeguards from wholesale investor exits. Mutual funds don't have that luxury because their shares trade daily, even if they own pools of infrequently traded assets. (See Third Avenue Management's high-yield mutual fund, which froze redemptions in December to manage its existing assets in an orderly way.)
But hedge funds don't necessarily end up with such a big advantage just because they have an extra couple of months to sell esoteric assets amid a deep, fundamental selloff. Energy junk bonds have been plunging for months with no apparent end in sight. Debt of certain retailers and communications companies, such as J. Crew and iHeartCommunications, have been relatively steady pain trades.
Meanwhile, Golub's credit hedge fund isn’t alone with its woes. Hedge funds that suffered losses last year received redemption requests worth $24.8 billion in January, eVestment data show, even as other strategies received deposits.
Credit hedge-fund manager Claren Road Asset Management, for example, shrank drastically in the wake of some steep losses, with about $1.3 billion in assets at the start of this year from a high of $8.5 billion in September 2014. After receiving withdrawal requests of about $2 billion in the third quarter, the firm told clients it would delay paying two-thirds of the money back to minimize damage to continuing investors.
Hedge funds certainly have some big advantages over mutual funds when it comes to liquidity. But their investors can be just as fickle as mutual-fund buyers. And all of them are finding that same narrow exit leading out of the credit markets.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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