Hedge Funds, Investor Liquidity and Ghana?

October 31, 2008 – In a perfect example of what is pressuring the current markets, adding to the deteriorating conditions, Deephaven Capital Management is reportedly freezing its $1.6 billion Global Multistrategy Fund so that managers won’t be forced to sell assets in the declining markets. Investors have apparently asked for 30% of their money back. It also suspended redemptions from its $70 million International Volatility Strategies Fund.

On the positive side, that Deephaven is freezing redemptions is a better alternative for most of us because it means the markets won’t be feeling the selling off of assets into weakness, creating further selling pressure. Hedge funds have been blamed for much of the selling pressure in the markets this October amidst mass redemptions.

One of the stories, and trends that we have been seeing is that many fund managers are shutting their funds down, which are so underwater that performance bonuses are off the table for the foreseeable future. The rationale is that they will start up new funds in coming quarters with a fresh track record where they will be able to re-qualify immediately for performance bonuses. The result in the near-term, has been a lot of selling pressure driving down our positions on a broad scale.

How many funds have taken this strategy, we don’t know. But the fact that it is a viable strategy for any funds shows a flaw in the system which could be fixed pretty easily – just legislate that fund managers can’t re-start a fund for seven years after liquidation in a previous one.

Getting back to Deephaven’s scenario, there are some negative implications of this as well. The fact that they are suspending redemptions from investors will discourage investors from investing in these vehicles in the future because they will be concerned about situations like this, where they were unable to tap their own asset sources at will. Imagine showing up at your local bank to withdraw funds only to be told that they are suspending withdrawals.

There are no happy solutions in the current environment, and to be sure, it will be years, if not decades before the markets gain back trust and confidence lost in the past year. Here is a fast fact, the world’s best performing stock market this year is Ghana’s index, which is up 63% this year.