Hedge fund firm Claren Road Asset Management is facing withdrawal requests for about half of its remaining assets, and may be forced to pay off investors and close its doors.
The firm is looking at almost $2 billion in withdrawals for the end of the quarter, according to Simone Foxman and Saijel Kishan of Bloomberg News who first broke the story; the numbers were confirmed by the company later today. A series of losing investments has led to Claren Road’s main fund slipping by 5.6% this year through mid-August, losing money with investments Greece, energy and the financial sector.
The problems first surfaced in 2014, when the hedge fund firm saw its first annual loss as bets on mortgage GSAs Fannie Mae and Freddie Mac went south. The firm’s AUM has plummeted to barely over $2 billion after hitting a peak of $8.5 billion a mere 11 months ago.
Private equity firm Carlyle Group owns 55% of Claren Road, and noted in a filing Monday that it anticipates writing down the value of its 2010 investment by $100 million to $175 million next quarter. The stake was valued at $216 million as of June 30th.
The senior management of Claren Road was not immediately available for comment.
More on problems at hedge fund Claren Road
Claren Road is currently speaking to all of its investors and putting the information together to assess what to do next, according to the hedge fund.
Claren Road hedge funds make a broad range of investments, including distressed debt and municipal bonds. The firm's main Credit Master fund was up a solid 1.7% in the first two weeks of August, but it had been down 7.2% as of the end of July. Claren Road’s smaller Credit Opportunities fund was down 6.2% so far this year through mid-August, but was up an impressive 1.9% for the month.
Of interest, hedge funds have seen have seen a 0.4% average return to date through Aug. 14, based on data from the HFRX Global Hedge Fund Index.
Claren Road confirmed the news in a filing with the SEC this afternoon, stating:
As of August 16, 2015, the final date for Claren Road’s fund investors to submit notices of redemption for the current quarter, Claren Road had received approximately $2.0 billion of investor redemption notices. This represents approximately 48% of Claren Road’s assets under management. These redemptions, and any future reductions in assets managed by Claren Road, will result in lower management fees earned by Claren Road in subsequent periods and lower earnings contributions to the Partnership from Claren Road. This is not expected to materially impact the Partnership’s liquidity or compliance with debt covenants.
As a result of these events, on August 17, 2015, the Partnership concluded that the carrying value of its intangible assets associated with the acquisition of Claren Road is impaired. The estimated net impact to the Partnership’s third quarter financial results, including the expected reduction of related liabilities for contingent consideration associated with Claren Road of $41 million as of June 30, 2015, is between $100 million and $175 million. The impairment charge is a non-cash expense and is based on certain assumptions and estimates that involve a high degree of judgment. The actual amount of the charge will be determined by the future inflows and outflows and performance of Claren Road’s funds as well as Claren Road’s plans for managing the redemptions.
The developments were a bit surprising considering performance was decent, although analysts had noted trouble at the unit. In an August 11th report, Goldman Sachs stated:
Although only a small part of FRE (3%) and DE, struggles at CG’s hedge fund affiliates, mainly Claren Road, could keep near-term GMS segment DE muted.
In a recent note, UBS listed the following as a question to ask management:
Why is GMS running into so many problems as of late? Have outflows at Claren road largely subsided at this point and were fees cut to retain AUM?
And in a different report stated:
Another topic of focus for investors was the negative headlines about hedge fund struggles at both Claren Road and Vermillion. The company noted that it has not received performance fees from Vermillion in several years and with Claren Road well below its high water mark, it would take really strong performance to see performance fees this year or next year.
JPMorgan noted after Q2 earnings:
While Carlyle’s dominant PE business continues to perform particularly well, a number of its other businesses are not. Its hedge fund business is top of mind with performance issues in its large credit manager Claren Road – we think redemptions will persist.