Business | Markets
Lehman Brothers collapse deals fatal blow to several hedge funds
Losses on stocks, bonds and commodities will be aggravated as firms write down value of assets they parked with the company that went under last month.
- Bloomberg
- Published: 00:07 October 2, 2008
New York : Lehman Brothers Holdings Inc's bankruptcy probably means the end of hedge-fund manager Oak Group Inc after 22 years in business.
John James, who runs the Chicago-based firm with $25 million (Dh92 million) of assets, didn't buy Leh-man stock or debt.
Instead, his potentially fatal mistake was to rely on the bank's prime brokerage in London, a unit that provides loans, clears trades and handles administrative chores for hedge funds.
He's one of dozens of investment managers whose Lehman prime-brokerage accounts were frozen when the company filed for protection from creditors on September 15.
"We're probably going out of business and liquidate, game over," James, 59, said. "We've lost 70 per cent of our assets."
The list of funds trapped in the Lehman morass keeps growing. London-based MKM Longboat Capital Advisors LLP said last week it will close its $1.5 billion Multi-Strategy fund in part because of assets stuck at Lehman, according to an investor letter.
LibertyView Capital Management Inc of Hoboken, New Jersey, owned by Lehman's Neuberger Berman unit, told investors on September 26 it had suspended "until further notice" attempts to calculate the value of its funds. LibertyView was not included in the September 29 sale of Neuberger to Bain Capital LLC and Hellman & Friedman LLC.
Managers with a smaller percentage of assets in Lehman limbo include Harbinger Capital Partners, Amber Capital LP and Bay Harbour Management LLC, which are each based in New York, and RAB Capital Plc and GLG Partners Inc, both in London. Olivant Ltd, run by former UBS AG President Luqman Arnold, said yesterday it can't access a 2.78 per cent UBS stake, worth about $1.4 billion, it held at Lehman.
PricewaterhouseCoopers, Lehman's bankruptcy administrator in the UK, where its European prime brokerage was based, doesn't know how much money is at stake. PwC said last month it's trying to recoup about $8 billion in cash that Lehman's parent company allegedly withdrew from its European unit before the collapse. It will take weeks, if not longer, to sort out the mess, according to PwC.
Worst year
Monique Wise, a spokes-woman for New York-based Lehman, declined to comment.
The Lehman fiasco is another blow to the $1.9 trillion hedge-fund industry, which is staggering toward the end of its worst year in two decades. Hedge funds fell an average of 5.3 per cent last month through September 26, according to the Global Hedge Fund Index compiled by Hedge Fund Research Inc in Chicago. The index has dropped 10 per cent for the year.
Losses on stocks, bonds and commodities will be aggravated as funds write down the value of the assets they had with Lehman.
"Some managers might say, 'Let's just take the bloodbath now' and write Lehman trades to zero," said Taco Sieburgh Sjoerdsman, head of research at Liability Solutions Ltd, a hedge-fund consultant in London.
"For many Lehman trades it would be very difficult to convince administrators that it's worth 100 cents on the dollar."
While clients yanked about 50 per cent of Lehman's prime-brokerage assets in the week before the bankruptcy, at least one, Newport Global Advisors LP, said its request for a transfer to another bank wasn't completed in time.
The Woodlands, Texas-based Newport, which managed $578 million primarily for pension funds, instructed Lehman on September 10 to move its assets to Credit Suisse Group AG, according to a request for information filed in US Bankruptcy Court in the Southern District of New York. Lehman confirmed the switch was being processed, according to the court papers. It didn't happen before the bankruptcy was filed on September 15.
Lehman's Wise declined to comment on Newport Global.
Hedge-fund administrators said funds will likely need to record Lehman-stranded assets in a separate account known as a side-pocket, which is set up for securities that can't be easily valued or sold.
"There's a lot of people scrambling right now to get as much information as possible," said Gavin Gray, managing director offshore operations for Phoenix Financial Services Ltd. in Dublin, which administers $12.5 billion in funds. "Administrators don't have the light to lead people to the right value right now."
Oak Group used Leh-man's unit in London because it allowed the fund to borrow more than US prime brokers, James said. Operating under different regulatory requirements, European prime brokers have been more generous than their US counterparts, sometimes even within the same parent company, said Michael Romanek, principal at Rise Partners Ltd, which arranges financing for funds from London.
"A lot of US managers would rather deal with Europe than New York," said Romanek. "Rarely do you see it go the other way."
James's account had pledged equity securities as collateral that Lehman then lent to other investors under a practice known as rehypothecation.
It's the fate of that collateral that worries many Lehman hedge-fund clients.
"The assets, once 'used', were no longer held for the client on a segregated basis, and as a result the client may cease to have any proprietary interest in them," PwC said in a statement on September 22. Complicating matters is Lehman's role as a counterparty for derivatives agreements such as credit default swaps.
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