NEW YORK Drake Management, which manages nearly $5 billion in hedge fund assets, told investors on Wednesday it is considering liquidating all three of its hedge funds, citing "challenging market conditions."
The New York-based fixed income trader, which was founded in 2001 by PIMCO and BlackRock executives, said it has been hammered by volatile credit markets, pushing down returns in its flagship, $3 billion Global Opportunities Fund and two other smaller funds, Absolute Return and Low Volatility.
Global Opportunities was down 24.55 percent in 2007, while Absolute Return was down 14.36 percent, according to investors who have seen the results. The funds overseen by managers Anthony Faillace and Steve Luttrell.
The credit crisis has reversed the fortunes for many top performing funds, forcing them to sell assets into a falling market to pay investors who demand money back, and banks who are pulling back credit.
"I expect there will be a lot more that will suffer the vicious cycle of deleveraging and redemptions," said Jim McKee, a hedge fund analyst with consulting firm Callan Associates. "This is a great opportunity for those with cash and those that have leverage are really getting whacked."
Drake said in a letter to investors that Global Opportunities has had "sharply negative performance" in the face of "extreme volatility of certain capital markets over the last six months." All three funds recently barred investor exits, or redemptions, amid rising losses.
Drake said it is polling investors for input on whether it should continue the fund, start new funds, or wind down Global Opportunities. It said it is considering similar options for the other funds. Drake manages more than $10 billion overall, about half in hedge funds.
"Given the challenging market conditions, Drake is also considering substantially similar options for its other hedge funds," said Drake said in the letter, which was obtained by Reuters.
Drake said that despite its travails, it is not facing margin calls from lenders -- a factor that has sent other funds into liquidation in recent weeks, such as the $2.5 billion Peloton Partners funds in London and a $1 billion municipal bond fund managed by Blue River Asset Management. Drake has cut back on leverage in recent months to better weather the credit crisis.
"To date Drake's hedge funds remain in good standing with all of its counterparties, having met all collateral requirements and obligations. Further, each of the hedge funds maintain a healthy cash balance," said Drake in the letter.
Drake said it would hold a conference call within the next week to discuss the matter. It said it has hired three law firms and a restructuring advisory firm with experience in helping "distressed firms and their investors work through challenging situations."
Drake took a negative view of the credit markets, saying it believes the market turmoil will "continue for some time."
It said it could try to continue to operate under the current redemption suspension, but said "market realities may be such that the existing funds have no other choice but to proceed to wind-down."
Drake officials did not return phone calls seeking comment.
(Reporting by Dane Hamilton; editing by Gerald E. McCormick and Tim Dobbyn)