Friday, September 25, 2009

Vicis Suspends Withdrawals

PIPE investor Vicis Capital suspended redemptions after investors requested $550 million in withdrawals for its Sept. 30 redemption period, Bloomberg News reported. Vicis has invested $177.5 million in 74 PIPEs since 2004, according to DealFlow Media. Investors stepped up redemption requests after learning that the Vicis Capital Fund, which has assets of about $2.5 billion, was down 12% for the year through August. Investors are showing an extremely low threshold for losses and volatility which has directly led to billions in redemptions and a host of funds suspending withdrawals.

According to a letter sent to clients, the firm received “higher-than-anticipated” requests for a Sept. 30th distribution from its
Vicis Capital Fund. In a PIPE strategy, exiting investments typically takes a longer time than a long-short equity fund, so when a large percentage of investment capital is redeemed at once, it could have cataclysmic results on the remaining investors. It is akin to a run on the bank, only there is no SIPC or Federal government to bail you out. The New York-based hedge fund will resume withdrawals if clients approve a plan to separate hard-to-sell assets into another pool, the letter said. The managers believe the separate pool is necessary as it is one of the only ways to retain value while eliminating toxic assets.

The firm said it plans to start a fund that mirrors the strategy of the Vicis Capital Fund. According to the letter investors can withdraw their money on an annual basis after giving 90 days notice so that the firm can seek to profit from longer-term investments. This is a strategy often employed by many funds these days. While this is one possible solution- there are many investors who will disagree with such a strategy. It may lead to investor law suits in which investor funds are used to fight investors who disagree with each other on how exactly each separate class of fund member should be treated.

According to people familiar with the firms - hedge funds including New York-based Fortress Investment Group LLC and Harbinger Capital Partners, last year, limited investor withdrawals to avoid raising cash by selling off holdings at distressed prices. Many managers are still faced with these tough decisions. The investors that wish to redeem- expect cash proceeds,
while the investors who wish to continue, expect cash to be used for further investment. The irony is, separate classes of investors in the same fund now have distinctly different goals and are at odds with the manager over how to appropriately deploy cash proceeds. Deploying depleting assets, while battling investors on both sides of the table has led to a tremendous increase in unfounded investor law suits. Defending suits further frustrates an already volatile situation, not to mention the six-seven figure price-tag, per suit which is paid for by the management fees, or in other words, by the investors.

The time has come to awaken and remember that there is risk involved in the stock market. The goal is to mitigate such risk while achieving upside potential. In fact, that is precisely what all hedge funds attempt to do. From the early nineties through 2007 many hedge funds succeeded because they mitigated the risk and therefore showed a strong return which led the average investor into the sector. It allowed the industry to proliferate. Unfortunately, we all forgot about the risk. Vicis Capital Fund is just one cautionary tale about a PIPE fund, its investors, its manager and the way of the world. Everyone made so much for so long, that risk and due diligence became an afterthought. The PIPE market has always had many risks which have been brilliantly navigated by most successful managers. The unforeseen risk in this case was the investors demanding their money back from everyone, everywhere all at once. It had never happened before in our lifetime, so no one was prepared for it, but it was an irrational reaction based on fear which has led investors down a prim rose path of selfishness and righteousness which is lined with man, many thorns.

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