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Blackstone to shut distressed debt fund in favor of lockups

Blackstone Group LP

Blackstone Group is ending its $3 billion distressed debt hedge fund and will shift most of the assets into other credit funds that lock up client capital.

The firm said it's offered investors in its GSO Special Situations Fund the option to move assets into other distressed credit pools that don't feature withdrawals. The special situations team, led by Blackstone partner Jason New, will continue to oversee the investments.

“We have decided to transition the investment activities of our hedge fund into our other distressed funds with longer-duration, drawdown structures,” spokeswoman Paula Chirhart said. “These funds better complement our competitive strengths and style of investing and will allow us to generate better risk-adjusted returns for our investors.”

Blackstone's decision is reflective of hedge funds' desire to shield themselves from quarterly redemptions, which can be difficult to bear when investing in markets as volatile as distressed debt. In late 2015, Marty Whitman's Third Avenue Management had to suspend redemptions in its main credit fund as outflows and losses imperiled its ability to meet further withdrawals. That sparked a broader industry movement to try changing the structure of credit funds, especially those investing in risky corners of the market.

Blackstone's special situations fund suffered losses in 2015, largely led by its exposure to coal and energy, and bounced back with a rebound in credit markets last year, two people with knowledge of the matter said, asking not to be named discussing private details. A gauge for the distressed bond market gained 54% last year, after recording losses of 38% and 20% the previous two years.

Such volatility can create uneven returns and spook investors. When clients can pull money frequently, funds can be forced to sell well-performing holdings to avoid a fire sale on more illiquid credits. That can leave the fund stuck with illiquid securities that are depressed in value.

The majority of investors in the Blackstone special situations fund have expressed a desire to keep their money within the firm's credit business, called GSO Capital Partners, the people with knowledge of the matter said.

Blackstone declined to comment on investor decisions and the fund's holdings.

The special situations hedge fund was started in 2005 and has generated annualized returns after fees of about 6.5%, Ms. Chirhart said. It's housed in the GSO business, which Blackstone acquired in 2008 and expanded nine-fold to be one of the world's biggest credit investors, with $93.3 billion as of Dec. 31. The group accounted for 16% of Blackstone's pretax profit in 2016.

One of GSO's partners helping manage the fund, Darren Richman, left at the end of last year to open a hedge fund with David Chene, the former head of U.S. distressed debt at CarVal Investors. GSO's global trading head, Craig Snyder, departed this month to lead distressed debt trading at Ares Management, and in February GSO said Alan Kerr, who led its European customized credit strategies, planned to leave.