Hedge fund failures to hit record as investors flee

A record number of almost 1,000 hedge funds will be forced into liquidation this year as torrid investment markets take their toll of the alternative investment industry and worried investors redeem funds.

A total of 693 hedge funds crashed during the nine months to the end of September, according to Hedge Fund Research, the Chicago-based research firm. This represents an increase of 70 per cent on the 409 funds that closed their doors during the same period last year.

If the trend continued, HFR said, a further 227 hedge funds would close in the remaining quarter, bringing the total for the year to slightly higher than 920.

The closures, which far outpace the previous high level of 848 in 2005, comes as the sector heads for its first full-year loss in a decade.

Unparalleled market downturns and regulatory crackdowns have threatened even the most established funds. Experts have predicted that as many as one in four funds will go to the wall and the overall level of assets under management will be cut by half. HFR estimates that the entire industry consists of 9,700 funds.

It has emerged that Tosca, the embattled hedge fund manager in London, which is trying to restructure its flagship fund, is bracing itself for its assets under management to tumble to as low as $2 billion (£1.3 billion) once it completes the process.

Tosca, which at its peak managed $8 billion of assets, has been heavily hit by sliding markets. The fund is down 62 per cent for the year to date. It was founded eight years ago by Martin Hughes, a former banking analyst who earned the nickname “The Rottweiler” for his aggressive approach.

The fund specialises in taking long-term equity stakes and forging corporate merger deals, but it has found itself on the wrong side of a string of recent investments.

It is understood that Mr Hughes considered walking away from Tosca this year but has committed himself to the hedge fund and invested more of his own capital.

Tosca proposed restructuring its main fund about two months ago, with Mr Hughes bringing in Mehmet Dalman, the former investment banking chief at Commerzbank, to spearhead the process as his vice-chairman.

The fund embarked on a series of presentations to investors over a plan to split the fund into two.

Sources close to Tosca said that the hedge fund had now been stabilised and that redemptions had been limited. They said that the firm was pleased with the loyalty shown by investors, with much of the fall in assets a result of market movements.

New client money was expected to flow into Tosca as early as next month, they said. “People wrote Tosca off, but we now know that it is going to survive this,” one hedge fund executive said.

Investors redeeming their capital from Tosca will be paid in January. They will receive about 30 per cent of their funds. Investors who are staying with the fund have agreed to remain invested for the next 12 months.

Miles Costello
December 19, 2008

Source: The Times

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