Fauchier extends fund withdrawal terms to invest more widely
Fauchier Partners, the institutional fund of hedge funds owned by BNP Paribas, justified tripling withdrawal periods on one product by arguing this allows it to invest in a wider range of underlying managers.
The decision comes as less liquid strategies, particularly distressed debt, grow in popularity.
The $8.1bn manager tripled the notice period redeeming investors must give its Fidam fund of funds, from one month previously.
Chief executive Christopher Fawcett said: “Particularly in certain strategies like long/short credit and distressed debt a number of event-driven funds have slightly longer withdrawal periods than global macro or long/short equities.”
Annual or even less frequent redemption cycles are not uncommon for distressed debt managers, compared to 75 days typical among more liquid strategies.
Fawcett said managers wanting to invest in debt with years to maturity or to take large or controlling positions in companies needed patient capital. He added a number of banks shrinking balance sheets were selling attractive but less liquid bank loans – often senior in the structure and floating rate – to managers.
He added: “We think deeply discounted distressed debt where the borrower is being restructured is quite advanced in the cycle and the next wave of distress will come when rates go up, or with a marked slowdown in the economy.”
Activists also needed stable capital to avoid having to trim stakes in companies to satisfy redemptions at the ‘wrong time’ in campaigns, Fawcett said.
Less liquid strategies did well this year. Distressed debt made 2.8% by 31 March, according to Hedge Fund Research, while investors in shares issued privately by small caps – called ‘Reg D’ – are up 9.3%. The industry has made 1.4%. Distressed debt received net inflows in all four quarters of 2010.
Fauchier’s latest term change is not its only one since the crunch. In 2009 it lengthened the withdrawal process on one fund because the best managers it wanted to stay invested in were extending their own terms to enable them to invest for the long term “and protect their business against flighty capital”.
Then, last June investors in its Jubilee Special Situations product agreed to an ‘investor level gate’, under which each could not pull over 12.5% of their capital on any one redemption day.
Fauchier said at the time: “We have to make sure we can pay investors out if they want to leave, however it would be wrong for one investor to provide the liquidity for another investor who wants to leave.”