CHICAGO - Grosvenor Capital Management LP, a big, highly secretive hedge fund player, was stung by an estimated $7 million investment in beleaguered Long-Term Capital Management LP, and reportedly has been hit with redemptions following poor third-quarter returns.
In a letter to investors obtained by Pensions & Investments from a nonclient, Grosvenor executives said they "experienced a crisis" in the strategy of the Grosvenor Multi-Strategy Fund LP, a fund of funds invested in Long-Term Capital.
Widening trading spreads in different markets led to unusually high market losses for the Multi-Strategy Fund in its relative value strategies. And, the fund's global opportunistic managers were hit hard by a net long exposure to Russia and other emerging markets, where trading liquidity had evaporated, and to energy-related commodities.
Grosvenor's executives declined to be interviewed for this story.
Grosvenor managed $427 million in the Multi-Strategy Fund and about $3 billion in total as of Sept. 30.
Returns for Multi-Strategy Fund were -9.4% in the third quarter, and -6.1% year-to-date through Sept. 30, according to Grosvenor's letter to investors.
Longer-term returns have been good. Since inception, May 5, 1971, the fund has returned roughly 14% annualized net of fees through Sept. 30, compared with the S&P 500's annualized return of roughly 13%, according to information in the letter.
The Multi-Strategy fund's allocation to Long-Term Capital, just 1.6% of assets as of January, contributed to 100 basis points of the fund's negative short-term performance, the letter states.
Grosvenor executives also noted in the letter that the Long-Term allocation earned an internal total rate of return of 17% from its inception in July 1994, in part because Grosvenor withdrew capital from Long-Term in January 1997 and January of this year. (It was unclear if the 1.6% allocation was before or after the liquidation.)
Grosvenor's firmwide performance was better than the Multi-Strategy Fund's, according to a source close to the firm. Grosvenor's composite returned
-7.7% for the third quarter and
-2.4% for the first three quarter, the source said.
Speaking on the condition they not be named, industry sources said Grosvenor has been hit with client redemptions in the fourth quarter, possibly from overseas investors.
The source close to Grosvenor confirmed there have been redemptions, although Grosvenor's year-end redemptions "are not particularly troublesome or concerning" to firm executives. That's because earlier in the year, investments with the firm were greater than redemption requests, putting the firm in a net positive position for the year.
In addition, the source said Grosvenor is in "really good shape," meaning redemptions at Grosvenor are smaller on a percentage basis than what other funds of hedge funds managers are experiencing.
Grosvenor required clients to give notice of redemption by Nov. 15, according to the letter.
At least one client, the $2.3 billion University of Chicago endowment, is holding on to its Grosvenor allocation of less than 1% of assets, although investment executives there are thoroughly reviewing the hedge fund arena.
Philip Halpern, vice president and chief investment officer, said university officials have had broad discussions with Grosvenor about its investing. "We think they are a first-class operation," he said.
He declined to discuss what the University of Chicago may do regarding its Grosvenor allocation.
Mr. Halpern did say that hedge funds in general will be under the microscope at his office. "The last four or five months have given us pause," he said. "We're evaluating the whole (hedge fund) area."
RJR Nabisco Inc., New York, hired Grosvenor and others as part of a hedge fund allocation in 1994, although it couldn't be determined if it still has an investment with Grosvenor. RJR pension fund executives were unavailable for comment.
Meanwhile, Grosvenor principals and their families are planning to withdraw about $5.5 million of their $55 million Multi-Strategy Fund investment at year-end to meet income tax and personal obligations, the client letter states. That group had lost $5.8 million in the fund in the first three quarters, the letter says.
Leighton W. Strader, Value Asset Management Inc. executive vice president, said he was unaware of big redemptions at Grosvenor. Value Asset, Westport, Conn., is an umbrella firm that owns more than 50% of Grosvenor Capital.
In the letter, Grosvenor executives attributed the Multi-Strategy fund's losses to "a severe decline in global liquidity" that resulted in a widening of trading spreads. Indeed, the Multi-Strategy Fund's relative value managers returned -13.2% in the quarter, while global opportunistic managers returned -11.1% and equity and debt managers returned -5.7%, according to the letter.
Grosvenor executives said the market behavior in the third quarter was unusual. "We have experienced a crisis for our strategy. . . . While unhappy with this result . . . we do not believe there is an asset or asset class in the world that seeks to earn a significant premium to the risk-free rate that cannot lose money in a crisis," the letter says.
The letter states that 190 basis points of the negative performance for the overall fund came from a net long directional exposure to Russia and other emerging markets, and from two managers that invest in commodities equities.
As of Oct. 1, the Multi-Strategy fund had a 20.5% allocation to relative value managers: 5.3% in relative value convertible bonds and warrants; 6.7% fixed income; 2.7% equities; and 5.8% multiple strategy.
The fund was 24.5% invested with global opportunistic managers: 3.9% global equities; 8% regional; 1.4% commodities; and 11.2% multiple strategies. And 53.5% of the fund was invested with equity and debt managers: 13.7% event driven; 29.7% hedged U.S. equities; and 10.1% short selling.
According to Managed Account Reports Inc./Hedge, New York, funds of funds returned -7.98% in the third quarter and -0.76% year-to-date through Sept. 30.
Lois Peltz, managing editor of MAR/Hedge, said she is hearing about a lot of redemptions at funds of funds, adding that these executives are likely to make changes in how they do business, taking a more active role in asset management.