Managers say tying up investor money for a year or more
enables them to buy less easily tradable but potentially more profitable
assets. It also reduces the pressure from monthly or quarterly redemption
requests when performance wanes. Extending the term also allows managers to
distinguish themselves from the growing cadre of “liquid alternative” mutual
funds that try to replicate hedge-fund-style trading but must allow daily
redemptions.
That investors are agreeing to the extended terms, or
lockups, demonstrates a significant shift in confidence since the financial crisis,
when trust was shaken by rapid market losses and some fund managers prevented
investors from withdrawing their money. That was quickly followed in late 2008
by Bernard Madoff’s admission he had been running a Ponzi scheme, causing
billions of dollars in losses for his investors.
Two-thirds of new hedge funds demanded a lockup of one year
or more in 2013, a 30% increase from the previous year. The average fund has a
lockup of 377 days. Those pushing for longer terms include funds managed by
industry stalwarts like Fir Tree Inc., GoldenTree Asset Management LLC, Trian
Fund Management LP and Viking Global Investors LP.
Some observers warn that investors should be careful about
allowing a manager to keep their money for so long, pointing back to the crisis
when some hedge funds—particularly those holding less-liquid assets— halted
withdrawals. Some investors still haven’t been paid back. Several investors
said they were skeptical that many hedge funds, particularly those that invest
in markets that are easily traded such as stocks, need the extra leeway. Some
pointed to the recent underperformance of these equity-focused funds relative
to their benchmark markets as a risk of extended lockups.
Some funds are increasing the length of lockups on new funds
in response to pressure from big investors to lower fees. Deep-pocketed
institutions such as corporate pension plans and college endowments are able to
lean on managers to lower fees.
For hedge-fund managers, increasing the lockup can be a
trade-off, particularly if they have to lower their lucrative cut of incentive
fees to get the deal done. Samlyn Capital LLC, a $5 billion New York
stock-focused hedge-fund firm, is knocking 0.25 percentage point off its annual
management fee and 2.5 percentage points off the performance charge for
investors willing to double their lockup to two years from one year starting in
January, according to people familiar with the firm.
Former SAC Capital Advisors LP portfolio manager Gabriel
Plotkin is charging far less than his ex-employer with a capped 30% incentive
fee at his new Melvin Capital Management LP, but he is imposing a three-year
lockup, longer than SAC demanded before it was barred from managing outside
money as part of its insider-trading settlement, according to a person familiar
with the plans.
Others pitching startups with similar drawn-out locks
include David Fear, former head of Ziff Brothers Investments’ London office. At
New York-based TIG, two new funds starting this year hold onto investor money
for three and five years, respectively—the longest lockups the firms has been
able to negotiate since the crisis.
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