As hedge funds approach an attrition rate of -7.0%.........

Fund Hedge New York: The wild pendulum swings of the markets and the bursts of extreme illiquidity have made for an anxiety filled approach to quarter end. By September 30th the hedge fund industry will have a clear handle on the dedication of its investors and how many are willing to hang in for what may be a continued wild ride to year end.

According to Hedge Fund Research it will also determine if the industry will remain on track for the liquidation of only approximately 700 funds, or if it will shoot past the 2005 industry record of 850 liquidations.

In any case, it is likely that there are multiple funds either in distress or about to enter a distressed state and at that point when “the noose begins to tighten, funds face the decision of do they pay the redemptions or take more drastic steps,” Ingrid Pierce, a partner in Walkers' Corporate and International Finance Department and head of the firm's Commercial Trusts Group told Opalesque.

Asking launching managers to plan for their possible future liquidation is akin to asking a spouse to consider a pre-marital agreement
“Throughout the entire hedge fund industry, 240 new funds were started in 2Q 08, while 180 were shut down.” (Hedge Fund Research) Those are sobering numbers for launching managers, and can serve as the cautionary tales for those managers at the pre-launch stage as well as those who already manage funds.

“There are ways of coming back from being a distressed fund,” notes Pierce, “but they are not attractive ways and they can sometimes cause a fund to go into real distress because investors lose confidence and they are not going to reinvest capital.” It is during the initial asset raising period that managers are very likely to make the decisions which will affect their ability to return from a point of distress back to being a stable fund.

Side letters and share classes…
Fund documents should allow the managers to impose gates, impose or extend lock up periods and determine when redemption requests are significant enough that investors need to redeem assets slowly and over a period of time. Experience has taught many fund managers that the competitive edge provided by these flexibilities often can mean the difference between survival and liquidation and so they largely incorporate these restrictions into their offering documents.

However, as the hedge fund industry has grown more sophisticated so too has the investor base. Side letters requested by potential investors which seek to sec......................

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As hedge funds approach an attrition rate of -7.0%.........


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