Bruised Hedge Funds Ask Clients for Fresh Cash to Buy the Dip

23 Mar 2020, 11:00 AM IST

(Bloomberg) --

First they lost money. Now hedge funds want clients to risk even more cash on the bets that caused the pain.

LMR Partners, Citadel, Baupost Group and Capital Four Management are trying to persuade clients to inject money into their funds after taking a hit in the coronavirus-fueled market turmoil. Capula Investment Management has had talks with some investors as it considers raising fresh capital, according to people familiar with the matter.

Hedge funds are marketing this month’s sell-off as a once-in-a lifetime opportunity to take advantage of unprecedented price dislocations across stocks, bonds and commodities. Their success in luring investors to jump in amid the market collapse sparked by the deadly pandemic –- a shock some are calling a black swan event -- may depend on how well they have navigated the chaos so far. Some have barely lost money, while others have seen drops more in line with market sell-offs.

“Liquidity and capital are king right now,” said Adam Blitz, chief investment officer of Evanston Capital Management. “Managers with capital to invest can play offense at a time when most are forced to play defense.”

Several long-biased equity, credit and relative value hedge funds have opened mid-month to tap money from existing clients, UBS Group AG said in a note sent by its prime brokerage unit on Friday.

Citadel, with about $30 billion in assets, is raising a new relative value fixed-income fund to target opportunities created by the recent surge in volatility. Trades in that strategy helped fuel losses of hundreds of millions of dollars earlier this month before the firm recovered, according to a person.

Coatue Management is gathering money for a long-only fund, people with knowledge of the matter said, while D.E. Shaw & Co., which runs more than $50 billion, is opening its biggest hedge fund to fresh cash for the first time in seven years.

Legendary fund manager Seth Klarman is also bargain hunting again. His Baupost Group invested about $1.5 billion in recent weeks and he’s seeking more commitments for his hedge fund for the first time since 2011.

Managers are maneuvering to exploit the sell-off triggered by the virus, which has spread across continents, forced countries into lock-downs and killed more than 10,000 people. Fears that the pandemic will lead to a deep global recession have ended the longest-running bull market in equities. Firms from Millennium Management to Bridgewater Associates have suffered some of the worst losses in their history this month.

There’s no guarantee that hedge funds will succeed in luring more cash. Investors have flooded relatively safe U.S. government money-market funds, pouring a record $249 billion into them in the latest week, according to Investment Company Institute data.

“Within the investor community, there is cautious appetite,” said Mithra Warrier, head of U.S. prime brokerage sales at TD Securities. She has seen some large investors make allocations recently, mostly to existing managers to capitalize on specific trade opportunities.

The fixed-income basis trade, designed to profit on the price dislocation between bonds and their futures, is one such bet.

Previously: Hedge funds betting on M&A post losses with deals in peril

“There are great investment opportunities right now and some might not play out next week, but will in a year or two,” said Blitz of Evanston Capital, which invests in hedge funds. “But you don’t want the fund to be forced out of compelling positions by margin calls or redemptions, so it’s important that they have a locked-in investor base.”

Kite Lake Capital Management and Melqart Asset Management are two London-based investment firms that specialize in merger arbitrage, which involves betting on the success and failure of announced deals. Both are deploying capital and in talks to raise more money to take advantage of plummeting share prices that have caused deal spreads to widen sharply, according to people with knowledge of the matter.

Losses at firms raising capital have ranged from a few percent to double digits in the first two weeks of March. LMR Partners fell 12.5% in its main pool while Baupost sunk about 8%. Capital Four Credit Opportunities Fund lost 6.9%, Capula’s relative value fund dropped 5.2% and Citadel fell about 3% in that time.

“Raising assets today is like calling the bottom, which seems to be quite a strong statement that very few investors will have what it takes to follow,” said Nicolas Roth, head of alternative assets at Geneva-based private bank Reyl & Cie.