Most clients will pull their cash out of Special Situations fund when withdrawals lock-up ends, RAB admits
One of the UK's most high-profile hedge funds – which included steel tycoon Lakshmi Mittal among its investors – has been overcome by clients demanding their money back, three years after damaging losses forced it to halt withdrawals from its flagship offering.
RAB Capital said most clients in its embattled Special Situations fund – which is infamous for buying into Northern Rock before the lender's collapse, and which fell by 70% in 2008 – will pull their cash out when a three-year lock-up ends in October.
Philip Richards, co-founder of RAB and manager of the fund, admitted: "We made mistakes in the runup to the crisis and that has been a chastening experience. We have learnt from it and are already using those lessons to the benefit of our investors."
At its peak in December 2007, Special Situations managed $2bn (£1.22bn), of which $200m was Mittal family money, but the fund has now slumped to $470m.
While the company claimed to have delivered investors a cumulative return of 5,000% over its pre-crisis lifespan, many hedge fund experts think the figure is misleading. One said: "This is textbook fund management. You start with a small amount of money, much of which comes from the founders, and get good returns.
"That performance then attracts more assets, which the fund takes because they attract more fees. But then the fund manager has to start looking for more and more investments, which end up being outside your area of expertise. That's when it all goes wrong and you can't turn it around."
RAB refused to say how much it had charged its clients in management fees to turn the $2bn into $470m or how much of the stellar performance was on small amounts of money. As of December 2003, Special Situations had $155.3m under management, while a year later it had $416m.
RAB said it will repay $370m of the $470m to its investors, who had agreed to the lock-up in 2008 after the fund, which held more than two-thirds of its portfolio in unlisted securities at one point, had trouble selling in illiquid markets.
RAB insisted that the redemptions were in line with its expectations and that it would be able to pay clients in full, adding that the redemptions would reduce 2011 revenue by around 5%.