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This investor is making serious money from pain in the hedge fund industry

15648409250_e25a27f5a0_oBy Rachael Levy From Business Insider

When hedge fund investments go sour, Andrew Lawrence will sweeten things up.

Lawrence is the CEO of Rosebrook Capital Partners, a firm that buys positions in hedge funds from investors who — for one reason or another — need their money back fast.

Consider a recent pitch that Lawrence heard from an investor in Visium Asset Management, the one-time $8 billion firm that is shutting down amid an insider-trading investigation.

The investor was looking to sell their stake in Visium’s Balanced Fund.

Visium suspended redemptions from its funds last month, and said that it would start returning investors’ money in July.

picture 27-33.pngBut Visium also expected to hold 3% to 5% of investors’ capital in a “reserve for possible liabilities and other contingencies” related to the SEC investigation.

Usually, when an investor wants out of a hedge fund, they get their money back directly from the fund manager. But those withdrawals — called redemptions — aren’t always possible as quickly as the investor wants.

So an investor looking to sell their stake in the Visium fund to Rosebrook is hoping to get cash back before everything is settled, and for some certainty in the size of their redemption. For Rosebrook, the opportunity would be to buy that stake for less than Visium is planning to return — and profit from the difference.

Lawrence declined to say how much the Visium stake was worth, but did say that Rosebrook is unlikely to take up the offer because it prefers more “quotidian” situations, such as bad performance. That helps his firm avoid more complicated situations, such as regulatory probes, which may involve lawsuits with the firm.

Some funds have so-called lockup agreements that keep investors from pulling out before a year is up. Others require three months’ notice, or prevent investors from pulling their assets all at once. The idea behind these restrictions is that a fund manager may have to sell off assets or pare back investments to get the cash for a redemption, and needs time to do so.

That’s where Rosebrook steps in — offering another option for those who can’t or don’t want to wait.

The fund has around $280 million of firepower, including leverage, according to a filing from March.

Lawrence expects to see more investors looking to sell their stakes, particularly as pensions and sovereign wealth funds grow tired of underperformance. The industry has collectively returned 1.6% through June this year, less than half of the gains of the S&P 500.

Rosebrook’s strategy can make boatloads of money, if played right. Rosebrook usually buys hedge fund stakes at $0.50 to $0.60 on the dollar, with hopes to get paid out later on by the hedge fund in full, Lawrence said.

So say an investor wanting out of a hedge fund has a $25 million stake. Rosebrook might offer to buy it for around $13 million, and will hope to get the difference later down the line.

Generally, there are three ways that Rosebrook and firms like it get a hold of illiquid stakes:

The investor looking to sell comes directly to Rosebrook.
The hedge fund asks Rosebrook to buy the unhappy investor’s stake. Some hedge funds have long-term lockups that an investor may want out of sooner, for instance.
The secondary broker market.

While Rosebrook sees a buying opportunity, some numbers show that the secondary markets space for hedge funds has slowed down. Last year, the amount of traded hedge fund stakes in secondary markets dropped 67% from the year before, according to a report by Setter Capital, a Canadian investment bank.

That’s related to the diminishing supply of side pockets, or separate accounts that hedge funds set up to separate illiquid investments from their main fund, the report said.

On the flip side, the secondary market has ballooned in recent years for private equity, where investors typically have to lock up their money for a decade.


sale fire sale everything must go Rosebrook Capital Partners buys positions in hedge funds. Random Retail/Flickr

Jacob Gottlieb Visium Capital  Jacob Gottlieb, founder of Visium. Screenshot via BloombergTV

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