Storming the Barbarians' Gates
JUNE 23, 2009, 5:37 P.M. ET
By GREGORY ZUCKERMAN
online.wsj.com
It may be time for investors to storm the hedge-fund gates.
During the market's crisis last year, more than 15% of all hedge funds imposed restrictions on investor withdrawals. The explanation from managers: Illiquid markets for some assets meant that selling would destroy value for their clients.
But one furious rally later, only a handful of funds have revealed concrete plans to hand back money, raising questions about whether some are actually resisting the move, perhaps to keep their firms alive.
Trading remains limited in some assets, such as some convertible bonds and insurance products. But some traders suspect that a number of hedge funds have improper marks on some of their investments, and if they sold positions it would force them to lower their returns.
Investors need to pressure funds to sell positions and hand back cash. If not, they risk being caught in a cynical game where funds cling to positions. By not complaining, funds of funds, for example, can pretend an investment still commands a high valuation and continue to charge high management fees by telling their own clients they can't get the money back.
There are rumblings that investors are beginning to fight back and push for liquidations. For example, Carl Icahn and other investors tried to stop Warren Lichtenstein's Steel Partners II fund from converting into a listed investment company, demanding a liquidation of the fund instead.
It may cause some short-term pain, but as the hedge-fund industry tries to recover from a year of broken promises, dropping gates is a vital component for regaining investor trust.
Write to Gregory Zuckerman at gregory.zuckerman@wsj.com
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