Henderson has removed a provision in documents of its AlphaGen Rhocas hedge fund allowing the curbing of redemptions, in a sign of managers continuing to eliminate features that were contentious in the credit crunch.
In Henderson’s case, the removal simply formalises the fact investors cannot be locked in, because clients already had long-standing separate agreements – called ‘side letters’ – that assured the manager would not bar them leaving when they wanted.
Henderson, and indeed Gartmore whose AlphaGen fund range it took over on buying its competitor, honoured the letter during the crisis.
Paul Graham, global head of hedge funds at Henderson, said the gating provisions for all its hedge funds are falling away, except for the AlphaGen Volantis, which focuses on small-cap UK shares.
He said most of the group’s hedge funds trade in deep enough markets to be encashed, if need be, within three days.
Rhocas, which has a global equities focus, had its gate provisions removed last week. Other funds must wait for their boards to convene, and shareholders to approve the change.
Gating hit about one third of all hedge funds during the 2008 crisis, according to analysis at the time by Credit Suisse, and it angered many investors intensely.
They have not forgiven managers who locked money in to save their own revenues, and businesses.
But many allocators now take a more pragmatic view now to those gating managers who were trying to treat investors fairly, and not have to sell holdings rapidly into plunging markets to pay out redeemers. This would have left remaining clients with fundamentally different, and devalued, portfolios as a result.
Managers like Henderson, and many peers such as CQS and RWC Partners, justifiably wear the fact they honoured all redemptions as a badge that sets them apart.
But Graham says to gate, and also to isolate some assets from forced selling in portfolio structures called ‘side pockets’, was not uniformly negative.
“In 2008 some managers did gate for the right reasons, and they performed much more strongly purely on the basis they did not liquidate those positions in a fire sale.
“In 2009 the side-pocketed assets in every fund I know performed better than the main fund. The uplift of return, particularly of UK and European smaller companies, could be five or six times for the side pocketed assets [the magnitude of asset gains in the main fund].”
It was not just the case for UK and Europe assets, of course, and not just equities.
Credit specialists Phoenix Investment Adviser in the US curbed redemptions on its flagship fund for five months at the end of 2008/start of 2009. President Mike Donoghue says he “hopes never to have to use a gate or suspend in any way again”, but independent data shows that doing it meant investors made 35% more than they would have, if they sold out at the end of 2008.
Gating may also have convinced some to stay on after the curb was lifted. Those that did so enjoyed a 150% rebound in 2009, leaving them up 50% over 2008/2009.
Although investors in AlphaGen Rhocas were free to leave at any point in the crisis – and some may have opted to do so as the portfolio’s euro class fell 17.2% in 2008 – those that stayed enjoyed a 46% rise in 2009, leaving them up roughly 20% over the two years.
Graham says a number of funds launching now give investors the choice of share classes where regular redemptions can be curbed – say, by up to 25% – and other classes where they cannot.
He added funds’ directors, who make the ultimate decision on gating, are “of a lot higher quality now at a lot of firms, and they take their fiduciary responsibility to investors very seriously”.