Are Hedge Funds Still Safe?
ALEX CHADWICK, host:
From NPR News, it's Day to Day. Hedge funds, those exclusive pools of capital that have made many of the rich even richer, they too are suffering in this financial crisis. September 30th, that's yesterday, is one of several days of the year when investors can cash out of their hedge funds as Madeleine covered in her interview with Tom Wolfe on the show yesterday. So, what happened? Marketplace's Janet Babin is here. Janet, what is so special about yesterday for these hedge fund investors?
JANET BABIN: Well, Alex yesterday was the last day of the third quarter and a lot of hedge funds have 90 day terms if you want to get your capital out. So, hedge funds needed to be notified by their partners or clients 90 days in advance if they want to get their money out. And yesterday would've been the day to do that - to get it out by the end of the year, that 90 day limit. And with hedge funds down about 10 percent this year according to Hedge Fund Research there's a lot of speculation out there that people in institutions probably yanked their money out yesterday.
CHADWICK: Well, when do we get to see the numbers? When do we find out how many people did decide to pull out?
BABIN: Yeah, we probably won't know that until the end of the year. I spoke to John Pinto about why that is. He's a managing partner of Brightleaf Capital Management, that's a hedge fund in North Carolina, and it manages under $100 million assets and like a lot of hedge funds it's got both high net worth and institutional investors. And Pinto explained to me that a lot of clients are limited partners. They're all limited partners in hedge funds. They have put in their redemption letters, and that's what it's called when you want to take your money out of a hedge fund, it's a redemption. But then there's usually a pushback from those letters from the hedge fund managers.
Mr. JOHN PINTO (Managing Partner, Brightleaf Capital Management): Limited partners will put in a redemption letter and then the hedge fund will call them and try to talk them out of it, but essentially it's an option that the limited partner has on deciding whether they do or don't want to take out their money.
BABIN: So, it's unclear just how many of those who may have asked for their money out yesterday will actually end up taking it out in three months. Those managers of course will try to convince those partners or clients to keep their money where it is.
CHADWICK: Well, what do they do to limit how many investors take money out of the fund?
BABIN: Well, one company according to Hedge Fund Research, and this company RAB Capital ended up getting a vote from its partners that'll allow it to freeze redemptions for three years. Now that fund saw its value drop by half so, if it didn't get that, if it wasn't able to do that it could have been liquidated.
CHADWICK: Are hedge fund investors, Janet, do you think worse off or better off than other people with money in the market?
BABIN: Well, I think they're in a special situation, Alex. Hedge funds goals have to make money no matter what's going on in the market, and to do that employ a lot of crazy strategies. One of them short selling that every ones been hearing so much about, betting a company or stock will fail. And now that the securities and exchange commission has a limited or banned on short selling on more than 900 companies that's got to be tough for Hedge Fund managers to make money in this situation.
CHADWICK: Thank you, Janet. Janet Babin of Public Radio's Daily Business Show, Marketplace.