The en masse gating of money in hedge funds during the global financial crisis caused more bad feelings than the asset management industry had seen for years.
Allocators being gripped by fear back in late 2008 was understandable.
Mike Donoghue, president of US-based fixed income specialists Phoenix Investment Adviser, and a 27-year veteran of those markets, says: “The world seemed to fall apart and there was no liquidity. 2008/2009 was like nothing I had ever seen. I think it is a once-in-a-generation kind of environment.”
Phoenix suspended redemptions on its flagship for five months to May 2009, as about 25% to 30% of investors in its flagship US high yield credit fund requested exit. The fund fell about 40% that year, according to databases.
“Normally we would just sell 30% of all the positions and give their money back, but the market failed to exist at the end of 2008, and we could not do that and treat people equitably, so we suspended.
“We have a fiduciary responsibility to protect all the other people in the fund that did not want to be forced out at the bottom.”
(Phoenix paid out redeemers from its flagship, in full soon thereafter.)
But Donoghue adds market liquidity returned “fairly quickly, as these are public US corporate bonds”. Independent data shows redeemers made a 35% gain in waiting for the curb to come off, compared to what they would have received if they had withdrawn at the end of 2008. Not everyone wanted to leave – indeed Donoghue notes “a lot of shareholders thought it was a great environment, it was an unbelievable opportunity with bonds at 30 cents on the dollar.”
Similar stories exist for convertible bonds, which lost 34% of their value in 2008, but then bounced back by 58.4% by 2010 – leaving ‘patient capital’ with a 4% gain over two years, not bad compared to a 28% loss on US shares over the same period.
The case of Phoenix’s flagship was even better, with 2009 bringing a 150% rebound for investors who stayed the full year, leaving them 50% better off over the two years.
The average hedge fund took longer to recover from the industry’s worst year on record, and some of course never recovered.
But if bad times come again, it will be interesting to see the extent to which allocators who stayed invested back then – even if only because gating forced them to – will recognise that, in the long term, patience can be profitable, and act accordingly.