deephaven103108
On the homepage
Food shelf
Out There
Cranes
Valentine's
Deephaven suspends withdrawals from two funds
Investors had sought to reclaim 30 percent of the $1.6 billion invested in two of the Minnetonka-based firm's funds.
Print this story
E-mail this story
Save to del.icio.us
Share on Facebook
Share on Digg
Minnesota business by the numbers
See Minnesota's top earning companies, CEOs and non-profits
More from Business
Deephaven Capital Management has frozen withdrawals from two hedge funds after investors demanded about a third of their money back, according to a Securities and Exchange Commission filing by Deephaven's parent company, Knight Capital Group of New Jersey.
The filing indicates more trouble for once high-flying Deephaven, one of dozens of U.S. hedge funds that are losing money and trying to stave off panic among well-heeled, seven-figure investors who put their faith in the unregulated investment vehicles. Deephaven is the second Minnesota-based hedge fund to freeze withdrawals in as many weeks.
Hedge funds often bet big by "leveraging" their investment strategies with up to $3 in debt for every $1 in investor equity. In volatile markets such as these, big gains can turn into big losses in a hurry -- especially when trading partners such as investment banks demand more collateral on the loans that finance a hedge fund's investment positions.
Minnetonka-based Deephaven apparently is unable to come up with the money to cash out investors who have soured on the fund's strategies or otherwise need the money. In the SEC filing Thursday, Knight said the boards of Deephaven's Global Multi-Strategy Funds, known as "GMS Onshore Fund" and "GMS Offshore Fund," concluded "that it would be in the best interests of all investors ... to suspend redemptions and withdrawals, effective immediately, in an effort to protect investors from being disadvantaged by the combination of the current extreme and unprecedented market conditions, the sudden and material industry-wide changes in margin and financing requirements ... along with pending redemption requests."
Investors have asked to redeem about 30 percent of the $1.6 billion invested in the two funds.
The larger of the two funds accounted for about 60 percent of Deephaven's $2.7 billion of assets under management as of the beginning of October, Knight said. That was down from $4.4 billion in October 2007.
Knight said it invested $48.4 million in the GMS funds as of Sept. 30, and $63.3 million overall in Deephaven funds.
A person close to Deephaven said the firm's contracts with investors permitted the firm to refuse redemption requests.
"Deephaven will proceed, in consultation with investors, promptly to develop a plan for meeting redemptions and for managing the GMS Funds under the current market conditions," the firm said in the SEC filing.
Volatility, dislocations
Ty Schlobohm, managing director of Cherry Tree Investments who also helps institutional investors pick hedge funds, said Minneapolis has been "a platform for best-of-breed hedge funds ... It is tragic that this unparalleled era of volatility and massive dislocations have not spared some of our most talented operators."
Last week, the Star Tribune reported, based on industry accounts, that hedge fund manager Whitebox Advisors won't let customers cash out. The Minneapolis firm, which manages about $4 billion in investor assets through several funds, has notified investors of recent investment losses and terms under which investors may redeem some of their money.
Earlier this year, Deephaven closed two funds worth $780 million, according to documents filed with the SEC by its parent company. Publicly held Knight Capital, which is also in the electronic-trading business, must report significant developments at Deephaven because Deephaven's results have a significant bearing on Knight's fortunes.
Deephaven, formed in 1994 with $5 million in assets, is nearly half-owned by executives Colin Smith, Shailesh Vasundhra and Matt Nunn.
Neal St. Anthony • 612-673-7144
Recent Business stories
Investment Technology Group names former J.P. Morgan trader to board - October 31, 2008
Investment Technology Group names former J.P. Morgan trader to board - Investment Technology Group on Tuesday named an executive from Schroders Investment Management to its board. More
- Obama says both sides have to give on health care
- Cribs recalled after 3 deaths
- World's tallest tower closed a month after opening
- Salsa Lisa going national after selling majority stake
- Downtown Minneapolis: 'Pretty strong' as recession ebbs
- HR and Facebook: It's complicated
- Toyota seeks damage control, in public and private
Comment on this story | Read all 1 comments | Hide reader comments