As Hedge Funds Stumble, One Firm Prepares to Buy Illiquid Stakes

  • Andrew Lawrence's Rosebrook seeks as much as $500 million
  • Firm sees chance to buy stakes in illiquid pools at a discount

The worst year for hedge funds since 2011 is good news for Andrew Lawrence, chief executive officer of Rosebrook Capital Partners.

Lawrence, 55, is seeking to raise $250 million to $500 million for a fund that will buy stakes in hedge funds that have suspended redemptions, according to a person with knowledge of his plans. The New York-based investment firm is betting on a burgeoning opportunity to acquire the interests at a discount from investors looking for a quick exit, said the person, who asked not to be identified because the information is private.

Hedge funds have lost ground since mid-2015
Hedge funds have lost ground since mid-2015

When investors in hedge funds rush to the exits at once, managers can find themselves forced to suspend redemptions to ensure that they return money to investors fairly and without sparking a fire sale of their holdings. Some managers put the hardest-to-sell assets in separate funds called side pockets and wait for prices to recover before unwinding the holdings.

Rosebrook is betting side pockets, which were employed more frequently during the 2008 financial crisis, will see a revival as hedge fund exits balloon, according to the person. Several firms have already limited redemptions after investors rushed for the exits.

Claren Road Asset Management said last year that it would delay paying two-thirds of the money investors requested in redemptions during the third quarter, instead placing assets in a liquidating trust. In December, Third Avenue Management halted withdrawals in one of its mutual funds, sparking a selloff in high-yield markets. Stone Lion Capital Partners suspended withdrawals from its junk bond hedge fund after receiving "substantial redemption requests."

Return Target

Rosebrook, which Lawrence co-founded in 2009, has spent $223 million over the years buying fund stakes with a combined face value of $635 million, the person said. The firm had previously raised two funds with Deutsche Bank AG.

The new fund, Rosebrook Opportunities Fund 2016, is expected to wrap up its an initial phase of capital raising in the second quarter, according to the person. It is aiming to generate a net internal rate of return of more than 20 percent. The fund, which is structured like a private equity pool, will have thirty months to deploy investor cash to purchase hedge fund stakes, and three years to exit the investments.

Lawrence declined to comment on the fundraising.

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