Claren Road has been having a rough year.
Hedge fund firm Claren Road has taken the unusual step of telling its investors who requested redemptions they’re just going to have to wait to get their money back.
Both analysts and disgruntled investors have commented that Claren Road’s decision to delay withdrawals harkens back to the financial crisis, when a number of fund managers upset investors by preventing exits. Of note, the contracts investors sign with hedge funds gives them a great deal of discretion in the timing of customer redemptions, but the practice of delaying pay outs has been rare except for the first few quarters after the 2007-2008 financial crisis.
More on Claren Road redemption delay
According to knowledgeable sources that spoke to the Wall Street Journal, Claren Road Asset Management will return close to $650 million in customer redemptions by the regular October payout date for redemption requests made in the third quarter. However, Claren Road will not repay he remaining $1.3 billion of investors’ funds for one or more quarters, the sources noted. Moreover, the firm is not providing a firm date for the full return of all funds.
Senior management at Claren Road argue the delay in redemptions was the best way to protect both their remaining and redeeming investors, sources close to the firm noted. In order to honor very large redemption requests in just a couple of months, hedge funds often have to sell their assets at a discount and leave remaining investors with a heavy concentration of more-difficult-to-sell holdings.
Industry analysts point out that Claren Road is primarily invested in in corporate debt and credit derivatives. Claren Road is a rare short biased credit hedge fund (it typically invests on the premise that bond prices will drop).
Of interest, a very large wager on mortgage GSEs Fannie Mae and Freddie Mac led to large losses for Claren Road in 2014.
Explanation from Claren Road
Claren Road wrote a letter to investors on September 21st, noting it had carefully considered all options before finalizing its plan. “In our estimation, the aggregate amount of redemption requests is too large as a percentage of the fund’s assets to be satisfied in cash in a single payment without unreasonably affecting all investors.”