The 1-and-15 Hedge Fund

UK fixed-income hedge fund manager Blue Bay is in some trouble:

Blue Bay said performance fees had fallen by 75 per cent in the second half of the year, to £4m in five months, compared to £18.2m in the second half of 2007. It has also been forced to freeze redemptions on one of its three hedge funds, to prevent investors withdrawing capital, although said in return it would cut management fees.

Mark Cobley has the details:

Investors have kept faith with the company thus far, pouring a net $3.5bn into the company’s funds during the five months to the end of May – more than expected. BlueBay previously forecast it would take in $2.5bn for the six months to the end of June…

BlueBay is also set to overhaul its $2.7bn Value Recovery Fund, which can invest in the debt of companies that are in trouble, as well as asset-backed securities and more conventional debt market instruments.

The company wants to suspend redemptions on the fund until July 2009 and “severely restrict” them thereafter, in return for a cut in the basic management fee from 2% to 1% of a client’s investment, and in the performance fee from 20% to 15%.

There’s something a little bit weird going on here. On the one hand, BlueBay had $3.5 billion of inflows in the first five months of the year, but on the other hand it’s having to slash fees on its flagship distressed-debt fund not to withdraw their money.

One can only assume that the inflows are going mainly to BlueBay’s emerging-market funds, which have presumably been performing reasonably well, and that there’s still very little investor interest in distressed debt, despite the fact that it seems to be the hot asset class right now for fixed-income investors wanting excess returns and lots of alpha.

Even so, it makes little sense for distressed debt investors to want to get out at the bottom of the market. Maybe they’ve just all decided that there are better distressed-debt investors out there than BlueBay. Or maybe they’re simply human, and much prefer to be invested in funds which are going up rather than in funds which are going down.

In any case, if you’re in the market for a distressed-debt fund, BlueBay’s VRF is now on sale, at just 1-and-15 instead of 2-and-20. Fill yer boots! It might go down further, but if it does at least the managers of the fund will be paid slightly less for the privilege of losing your money.

(HT: Lex)

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