More Stories From The Bizarre World Of Hedge Funds

LOCKED IN
When Hedge Funds Bar the Door
Ritchie Capital Battles Investors,
Holds Tight to $2 BillionBy SUSAN PULLIAM



From the WSJ July 2,2008

“Investors once clamored to get into Ritchie Capital Management, a high-profile hedge fund. Now, some are scrambling to get out -- and are finding the doors locked.
Following bad bets and big losses, A.R. Thane Ritchie has barred investors from leaving his fund, which is currently valued at $2 billion, down from almost $4 billion in 2005…..
The tussles illustrate the "roach motel" nature of hedge funds, where once investors get in, they can't always get out. Amid a continuing credit crunch, a growing number of hedge funds are restricting people from withdrawing their money for a period of time. Funds say they have no choice: To return the money, they'd have to sell off assets, leading to deeper losses for all their investors. But critics say locking down investors' stakes chiefly benefits fund managers, who get to keep earning hefty management fees.
Hedge funds were expected to be hit by requests from investors to withdraw their money at the end of June, after an especially tough second quarter. Analysts say it's too soon to determine the extent of these requests since it takes time for a fund to agree to them and then to raise money by selling off shares.
But with many funds invested in hard-to-sell, illiquid assets, some of those requests could be denied in the coming weeks -- and legal experts say a wave of litigation could follow. Limiting investors' withdrawals "has led to uneasy situations between managers and their investors, and frequently to the beginning of the end of the funds," says Leor Landa, a lawyer at Davis Polk & Wardwell who represents hedge funds.’

Ironically Ritchie’s stepfather one of the greatest options traders and founder of Chicago Research and Trading pulled his money out of Ritchie Capital Management’s funds in 2004 as the fund entered into more and more aggressive trading strategies.
It could be that the investment flows into hedge funds has peaked (see graph) as investors realize that there is no such thing as a low risk, positive alpha, absolute return strategy that will generate attractive returns in up and down markets.