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New Managers April 2013

47N Series - Barbarians at the gate

Fraser McKenzie

This article was authored by Fraser McKenzie, Manager Partner, 47 Degrees North Capital Management is a specialist alternative investment firm, and a pioneer in early-stage hedge fund investing. It was selected as one of three successful candidates out of 97 applicants to manage the emerging hedge fund managers program at CalPERS.

47N is a leading proponent of corporate governance in the hedge fund industry; so the objective of this series of articles is to discuss and inform on current corporate governance issues.

A barbaric trend seems to be emerging amongst hedge funds; more and more are using investor-level gates. This construct allows managers to restrict investor redemptions (most often to 25% per redemption period) based upon their individual investment amount - as opposed to the more common fund-level gate which restricts investor redemptions based on the overall amount of redemptions a fund is experiencing. The fact that Moody's calls investor-level gates a "credit positive" event for hedge fund asset-liability management should set alarm bells ringing amongst investors. Any advantage created by lawyers for a hedge fund is likely to have a hairy side.

It's possible that this recent trend toward investor-level gates is part of the five-year hangover from the 2008 financial crisis when managers were trying to find ways of avoiding the massive redemptions that blighted the hedge fund industry. A more cynical observer might suppose that investor-level gates act as a preserver of management fees......................

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This article was published in Opalesque's New Managers a top-down monthly analysis, news and research publication on the global emerging manager space.
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