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Capital Markets

Hedge fund strategies: Credit funds continue to sink

Distressed seems the right route to take.

As credit hedge funds increasingly stall, the distressed markets might seem the only option left. Another month, another hedge fund closes its doors because of bad credit bets. In February, Sailfish Capital Partners, a $2 billion-plus fixed-income manager, shut up shop because of sharp falls in value in its supposedly safe top-rated investments. Sailfish certainly won’t be the last to fall either. Event-driven funds’ average losses were more than 2% in January, according to most hedge fund indices.

An increasing number of funds invested in credit, if not closing, are being left with no alternative but to prevent redemptions. To avoid a fire sale of illiquid assets, Citi was forced to suspend investor withdrawals from CSO Partners, a hedge fund that focuses on corporate credit. The fund lost 11% last year. "We have temporarily suspended redemptions of all shares of CSO to stabilize the fund and allow time to address its funding needs to meet anticipated obligations," Citi said in a statement. And in January, Elgin Capital, a $3.3 billion London credit specialist, blocked withdrawals after big losses on leverage loans.

Investors are unhappy about being locked in but they are in a weak legal position.

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