Hectic Week For Cerberus With Locked Funds, Default Rumours, Investor Losses

Hedge funds, with their wildly fluctuating rates of return and dependence on the short-term health of investments, are pretty much the first place you start removing funds from during a crisis, so they’ve been feeling the burn recently. Not even Cerberus, one of the world’s biggest funds, can manage to stop the rot – they’re planning to lock down two of their new funds to prevent investors taking anything out of them for three years.

Cerberus have been substantially affected by the $500bn removed from all hedge funds over the last year; earlier this week they were hit with the news that some investors want out, with $5.5bn being cashed, equal to 71% of the total invested in the two funds affected (Cerberus told the FT it was more like 60%, but whatever, it’s a lot). Cerberus originally blocked the redemptions back in December, but are now letting them through in a controlled wind-down program. Nevertheless, such a colossal drop in assets sent the rumour mill a-spinnin, with people whispering that Cerberus’s funds were on the edge of defaulting – the rumour was quickly and publicly denied yesterday.

In the fat years, Cerberus craved the dynamism and manoeuvrability of hedge fund investment, but now they’re seeing how vulnerable a few bad deals can make them. A 2007 deal saw them buy out Chrysler, with the hope of slimming it down, boosting efficiency and management, and selling it on for profit – what happened was the company went into government-sponsored bankruptcy, and saw its lending arm, a potentially lucrative business for Cerberus, get wound down. GMAC, the lending arm of General Motors that took over Chrysler’s lending, was also taken over by Cerberus back in the day, but they won’t reap the rewards of that loan book as they’ve lost control of GMAC to the American government. Cerberus could lose $1.5bn even after the income they take from Chrysler’s winding-down loan book.

So Cerberus need a stable source of income fast, hence the new-style hedge funds that won’t let people bow out at a moment’s notice. They also told the FT that they were not going to be going after the likes of Chrysler again, preferring the smaller, low-profile clients they used before. It’s a rather pleasing instance of the industry self-regulating in order to stay alive, going after the sober private-equity-style deals rather than the Monte Carlo money-chucking of hedge funds. But even so, is anyone going to trust Cerberus with their money after this ugly year?

Posted by Ben Beaumont-Thomas in Hot Money | September 3, 2009 11:45AM |