December 12, 2012 / 10:41 PM / 7 years ago

To get cash back, some hedge fund investors will have to wait

BOSTON (Reuters) - Some investors in hedge funds will have to wait to have part of their investments returned in cash.

Alden Global Capital’s Alden Global Distressed Opportunities Fund LP, known for snapping up stakes in media and publishing companies, told investors that redemption of a portion of their investments would be delayed.

According to a letter reviewed by Reuters, Alden Global Capital has put some of its clients’ redemption requests into a sidepocket, effectively restricting immediate access to some of their money. “A portion of your withdrawal request for the August 31 withdrawal date will be placed into an Alternate Withdrawal Account,” said the letter, dated that day.

The restriction, which has not been previously reported because the fund is private, follows on the heels of a difficult 2011 when the fund, founded by vulture investing specialist Randy Smith, suffered losses of more than 20 percent.

Alden has been a major investor in media companies including Tribune Co, Philadelphia Media Network and A.H. Belo Corp, and said proceeds from assets put into the sidepocket would be distributed within 12 months of the time they were put in.

Restricting investors’ full access to their money has always created a stir in the hedge fund industry. “You are certainly inconvenienced even though you may not be damaged,” said Ken Phillips, chief executive of HedgeMark, which helps investors construct hedge fund portfolios and manage risk. “Effectively all of your choices have been taken away.”

To be sure, restrictions on redemptions, sometimes also called gating or sidepocketing, are not occurring with great speed this year, industry analysts said, noting that these types of moves were seen mainly during the financial crisis. “We are not hearing a lot about it,” Phillips said.

But any move to restrict access is noteworthy, particularly if it coincides with heavy redemption requests after a period of poor performance. It often suggests that funds are invested largely in hard-to-sell assets.

According to an investor survey conducted by consulting group Aksia, hedge fund managers reported that 72 percent of their clients have not changed their preferences on liquidity terms. But managers said that 17 percent of investors wanted greater liquidity, while 11 percent would accept lower liquidity.

Hedge funds, unlike mutual funds, traditionally lock investor money for many months and sometimes even years. They also often have clauses in their documents allowing them to restrict access even more sharply if they feel that is necessary.

Other firms that have recently limited access include Salient Partners LP, which cut the withdrawals investors can make from its Endowment Fund. Investors are now able to pull out only 5 percent of their money by year’s end because a chunk of the fund’s investments are in less liquid assets, the group said recently.

Perella Weinberg Partners’ $1.4 billion Xerion Fund also recently told investors about a small twist in how they will get their money back.

Dan Arbess, who delivered gains to Xerion investors during the financial crisis and has long made successful bets on private investments, told investors that the bulk of redemptions will be made in cash. But investors will have a choice to receive a small portion returned as an interest in one the fund’s private positions or to allow Arbess to manage it until a sale is made on their behalf, according to a person familiar with the fund.

The fund is up roughly 8 percent this year but suffered losses in 2011, which helped prompt the redemptions. “The move is certainly not a disaster,” said a person familiar with the fund’s moves.

Reporting By Svea Herbst-Bayliss; Editing by Steve Orlofsky

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