Saturday, December 13, 2008

Citadel Halts Withdrawals From Two Hedge Funds After 50% Drop

(Bloomberg) Citadel Investment Group LLC, enduring its biggest losses since starting in 1990, halted year- end withdrawals from its two biggest funds after investors sought to take out $1.2 billion, or 12 percent of assets.

Withdrawals may resume as early as March 31 for the Kensington and Wellington funds, the Chicago-based firm said in a letter yesterday to clients. The funds, which together manage about $10 billion, have lost 49.5 percent of their value this year through Dec. 5.

“We have not made this decision lightly,” Citadel founder Kenneth Griffin, 40, wrote. “We recognize how a suspension impacts our investors, especially those with current financial obligations of their own to meet.”

Firms including Fortress Investment Group LLC and Tudor Investment Corp. also have limited redemptions to avoid dumping securities to raise cash. As of October, 18 percent of the industry’s assets, or about $300 billion, were subject to withdrawal restrictions, according to Peter Douglas, principal of Singapore-based hedge-fund consulting firm GFIA Pte. The limits have been imposed by about 5 percent of managers.

Hedge funds declined 18 percent on average through Nov. 30, according to data compiled by Chicago-based Hedge Fund Research Inc. That’s the most in a year since the firm began tracking the data in 1990.

Citadel has among the strictest redemption rules. It normally allows clients to take out up to 1/16th of their money quarterly. If redemptions in any quarter exceed 3 percent of fund assets, investors incur a fee ranging from 5 percent to 9 percent. Withdrawals have never before surpassed the limit.

Easing Expenses

The firm will also absorb “a substantial portion” of the funds’ expenses this year, the letter said. Citadel clients usually pay these charges, which have traditionally amounted to about 3 percent to 4 percent of assets.

The fund is holding between 25 percent and 30 percent of its assets in cash.

Katie Spring, a spokeswoman for Citadel, declined to comment.

Before 2008, Citadel had posted just one losing year, dropping 4 percent in 1994. Three Citadel funds, whose returns are tied to the firm’s market-making business, have climbed about 40 percent this year. Those funds manage about $3 billion.

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets, bet on falling as well as rising asset prices and participate substantially in profits from money invested.

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