I was reading Paulson Funds latest client letter (hat-tip Kedrosky). It is an enviable list of the things he got right this year. However one section jumped out at me – a hand grenade thrown at about 100 hedge funds:
Redemption policyAs a firm, we have not imposed any gates or other restrictions on clients withdrawing their assets. While we recognize the difficulties of the current environment, we think it’s a manager responsibility to raise liquidity to meet the needs of their investors. There is plenty of liquidity in the markets. Even in opaque areas of the markets such as in bank debt, mortgage backed securities and other distressed securities, we see hundreds of millions of dollars trading every day. We are especially surprised that many managers have restricted client withdrawas when: 1) the total redemptions are manageable (15-25% of AUM); 2) the managers have the cash; and 3) one of the stated reasons for restricting withdrawals is so the manager can continue to invest in new opportunities. Emphasis added.
I read this as John Paulson saying that there are funds which have easy enough to mark to market assets and where the assets are sufficiently liquid are refusing to give money back. Theft or fraud. Or maybe both. Moreover the liquidity according to Paulson is sufficient that funds almost never should have stop withdrawals – even in opaque areas of the market.
Now I guess it is up to John Paulson to name names – or perhaps some enterprising WSJ reporter can do it for us. Whatever – this is a big story.