Investors Examine Each Other

Chidem Kurdas

Fund clients are showing greater concern about fellow clients. This is a consequence  of the redemption frenzy of 2008-2009, when some investors withdrew from funds in a bad market because they had an urgent need for money, often to meet margin calls. This forced funds to sell at losses that could have been avoided by waiting. Other investors were harmed. Many managers suspended redemptions.

“The investor base is very important to us,” says Lorrie Landis managing director of credit investments at Tulane University. “We want funds to be very stable, don’t want to be hurt by whatever is going on with another investor.”

Fund managers also are paying more attention to the kinds of clients they get.  Suzanne Murphy, head of strategic development at credit fund manager Claren Road Asset Management, said Claren Road’s investors used to be almost all a single type—95% were funds of funds.

It was a problem to attract other investors, says  Ms. Murphy. In 2008, Claren Road did not suspend redemptions and as a result was among the to-go funds for investors who needed money—it became an ATM machine! Now the investor base is diversified by client type, size and geography. Less than half the investors are funds of funds.

In a pinch funds of funds are regarded as more likely to herd together to the exits, whereas a combination of pensions, endowments, wealthy individuals and funds of funds is seen as more stable.

Claren Road emerged from the crisis in good shape, with $4.5 billion in assets. This December private equity firm Carlyle Group announced that it will purchase a 55% stake in Claren Road.

Ms. Landis and Ms. Murphy both spoke at a conference organized by GlobeOp, the fund administrator.


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