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Hedge funds: Ritchie locks up liquidity

Longer-term investments can antagonize investors with shorter-term views. Ritchie Capital looks to have found a way to defuse the conflict.

Update: What’s going on at Ritchie Capital?

Euromoney February 2007

In the middle of October, 83% of the investors in Ritchie Capital’s flagship fund agreed to a restructuring plan put forward by the firm and its largest investors to tackle an issue faced by many hedge funds investing in private equity – liquidity mismatches between investors and investments. The multi-strategy fund had been facing criticism from some investors since mid-2005.

In early 2005, Ritchie sent a letter to investors in the fund explaining that, as the fund had been making increasing investments in private equity, it felt that longer lock-ups and gates would ensure that returns would not be damaged by short-term redemptions. Essentially, it argued, the full value of private equity investments would not be seen if money was pulled out early.

The fund had been performing well since its inception in 1999, and when investors came to vote at the end of August for the new liquidity terms, the majority agreed. Unfortunately for Ritchie, the multi-strategy fund had exposure to another of Ritchie’s funds, an energy fund, that had a disastrous August. By the time the losses in the multi-strategy fund were announced to investors, it was September, and some investors were convinced that the lock-up proposals had been orchestrated to stop the redemptions that would follow the downturn in performance.

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