Hedge Fund Lutetium Plans to Liquidate, Return Investor Cash

Lutetium Capital and the Stress of Distressed Credit

Lutetium Capital LLC, a hedge-fund firm that invests in distressed securities, is liquidating its two credit funds and returning all of the money it was managing to investors by next month, according to co-founder Michael Carley.

The firm oversees approximately $150 million, according to a person with knowledge of the firm who asked not to be identified because the information is private.

The Stamford, Connecticut-based business told investors it would liquidate the funds in a letter last week following redemption requests from some of its clients and losses, Carley said. Investors in Lutetium’s liquid alternatives product had wanted their money back and the firm decided to liquidate its hedge fund holdings as well, he said.

“We returned capital to every one of our investors to treat all investors equally,” said Carley, the former co-head of distressed debt at UBS Group AG. The firm invested money from its liquid-alternatives fund and its hedge fund in the same debt securities, meaning that selling the holdings from one of the funds would likely push down the value of the assets in the other, Carley said.

The firm’s funds lost 4 percent this year, Carley said. Hedge funds that invest in distressed debt globally have lost an average of nearly 6.8 percent this year, according to data compiled by Bloomberg.

Liquid-alternative funds have become popular among retail investors and some institutional clients because they charge lower fees than hedge funds and sometimes allow daily or weekly withdraws. Retail investors, through a broker or private bank, can invest $1,000 or less, far lower than the $1 million of initial investment hedge funds typically require.

“No one foresaw a year like this year,” Carley said. “My mistake was that I relied too heavily on the liquid alts; that was the easiest money to get.”

Lutetium’s decision comes after three high-yield funds, including a $788.5 million mutual fund run by Third Avenue Management, suspended redemptions in December, intensifying concerns that investors in risky debt may face more losses.

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