(Updated May 25, 2011 10:45 am ET)
FrontPoint Partners is liquidating its flagship FrontPoint Multi-Strategy Fund, but one of its most successful single-strategy hedge funds — FrontPoint-SJC Direct Lending Fund, managed by a team led by Stephen J. Czech, partner and portfolio manager — and other single-strategy funds will continue.
The onshore and offshore versions of the FrontPoint-SJC Direct Lending Fund LP closed in January with aggregate commitments of more than $1 billion, mostly from institutional investors, including the $24 billion South Carolina Retirement System Investment Commission, Columbia, and the $6.6 billion Arizona Public Safety Personnel Retirement System, Phoenix. The funds, which provide privately negotiated senior secure loans to U.S. middle-market companies, have a six-year lockup.
Mr. Czech wrote in a letter to investors obtained by Pensions & Investments that “we expect the decision to unwind the FrontPoint Multi-Strategy Fund will have no impact on the business, financial position or operations” of the direct lending funds because they are “legally, operationally and financially separate” from other FrontPoint multi- and single-strategy hedge funds.
Mr. Czech wrote that direct lending funds have invested more than $400 million to date in middle-market loans since inception; have commitments outstanding to give another $210 million in new loans; and that his team is “actively seeking” new loan commitment opportunities. Mr. Czech said his team is actively recruiting additional investment professionals.
According to the client letter, FrontPoint Partners made “the decision to proactively unwind” the multistrategy hedge fund because it “received a level of redemptions” that prevented the investment team from “maintaining the diversified investment strategy and objectives” of the fund. “As a result of the unwinding of the Multi-Strategy Fund, FrontPoint Partners had to liquidate some, but not all, of its single-strategy hedge funds,” the letter said.
According to a source with knowledge who requested anonymity, the funds that are closing will be completely liquidated by June 30.
Steven G. Bruce, a FrontPoint Partners spokesman, did not immediately respond to a request for additional information about the other FrontPoint single-strategy hedge funds that will remain open and the size of the redemption requests the company received for the second quarter.
FrontPoint Partners had estimated redemption requests of about $3.5 billion through the end of the first quarter, which dropped its total assets under management by about 47% from the $7.5 billion it managed at the beginning of November.
In a May 20 e-mail, Mr. Bruce wrote: “We have received capital redemption requests from some of our clients ... as a result, we are bringing our FPP strategies to a proper level of liquidity. … These actions are affecting each strategy differently at FPP and as a result we will be winding down select strategies. The remaining core strategies will continue to invest client assets as always. … While smaller as a result of these client requests, FrontPoint’s business will continue.”
The surge of redemption requests stem from an insider trading scandal involving Chip Skowron, a co-portfolio manager of FrontPoint Partners’ now-closed health-care funds. Prosecutors charged Mr. Skowron with fraud last month. He was accused of avoiding more than $30 million of trading losses after a French doctor serving as a consultant to Rockville, Md.-based Human Genome Sciences Inc. passed on that a hepatitis treatment had adverse effects during trials.
Mr. Skowron will plead not guilty, his lawyer, James Benjamin Jr., said in an April 14 statement. Yves Benhamou, the French doctor who is alleged to have tipped Mr. Skowron to inside information, pleaded guilty on April 11 and is cooperating with U.S. prosecutors.
Bloomberg contributed to this story.