The typical structure of a hedge fund can be precarious. For example, there are usually huge amounts of leverage. At the same time, investors can redeem their shares, which often happens in tough times. The upshot: a fund may have to shut down.
Just look at Citadel Investment Group. As of the end of November, the firm's two main funds have lost close to 50%. What's more, investors are requesting redemptions of $1.2 billion, which comes to 12% of overall assets.
What to do? Well, Citadel isn't going to honor the redemptions -- at least for now.
No doubt, this will anger investors. But, hey, in the hedge fund world, the investors are sophisticated, right? Shouldn't they anticipate such things? Besides, other hedge funds have done the same thing (such as Tudor Investment Corp.)
To allay things, Citadel is making a concession. That is, the firm is going to pay its own operating expenses for 2008 (keep in mind that this usually comes out of investor dollars). And this is no small amount, which could be $200 million to $300 million.
The problem is that -- in light of the huge investment losses -- it will be extremely difficult for Citadel to generate incentive fees. So, in light of this, why will top employees stick around? If anything, they may start their own funds.
In other words, Citadel is in a tough spot right now. And, it could easily take many years for the firm to regain its former stature – if it ever happens.
Tom Taulli is the author of various books, including The Complete M&A Handbook
Reid Hoffman: LinkedIn will go public (at some point)
Retailers can't wait for Black Friday, open Thursday
Tiffany's serves up solid quarterly earnings
Reader Comments (Page 1 of 1)
12-14-2008 @ 3:47PM
BHarrison said...
It is wryly amusing when people express concerns in regard to "top management people leaving a firm" at this point in time.
Yeah right, left them leave? . . . to where? There aren't any open financial managment positions floating around to be filled; at least not at their old salry levels. And if these people want to try to start their own "FUNDS" then they are welcome to do that . . . but what FOOLS would invest in them. The "tip of the icebergs" in corporate, stock, and fund FRAUDS is just beginning to expand. ONLY a FOOL would invest in such a fund. And if anyone is foolish enough to do that, then let them gamble their money on these HIGH RISKS VENTURES. " A fool and their money are soon departed from each other."
If these management people, who obviously did horrible jobs of managing investments to the point of losing 50% or more of their clients investments, want to "leave" then I would gladly show them to the back door.