Russell hedge fund closure hits local instos

Approximately $50 million of New Zealand institutional money is in limbo following the decision to close a Russell fund of hedge funds.

Friday, April 4th 2008, 7:02AM

by David Chaplin

The Russell Alternative Strategies II Fund, which is listed on the Irish Stock Exchange, was forced to shut down following a run on redemptions that have seen close to 70% of shareholders seeking an exit.

According to a circular to shareholders, Russell was first forced to impose a "redemption gate" on the Alternative fund on March 3 after it received requests to sell from more than 10% of the shares on that dealing day.

"... as at the date of this letter [March 26], the percentage of the Fund's assets which are either redeemed or which are the subject of a redemption request now represent approximately 68% of the Fund's assets under management as at the end of 2007," the document says.

While the size of the Alterative Strategies II Fund is unclear, it is understood New Zealand institutional investors, including groups such as Environment Waikato, have collectively sunk about $50 million into the product. The fund, which invests into over 30 underlying hedge fund managers, is open only to wholesale investors.

In a letter sent to New Zealand clients signed by Delwyn Dunnett, Russell client service manager, the firm recommended that investors here should put in redemption requests in time for the May 1 dealing date.

The Alternatives fund is open for redemptions monthly but the March and April dealing days were subject to the "gate".

The Russell shareholder letter says redemption requests for the May 1 dealing date should be in by April 18 Irish time.

However, the Russell document says the fund will switch to quarterly redemption payouts to manage an "orderly" liquidation with the first payment not expected until November this year at the earliest with the price yet to be determined.

But even this payment date may be optimistic because "the underlying funds are themselves facing liquidity challenges... which could result in further delays in the payment of redemption proceeds".

Russell's letter to NZ investors says: "It may be some time before you receive redemption proceeds in respect of your request, particularly given the effect of the gates. At this time we do not have a timetable for the delivery of redemption proceeds."

The letter to Russell shareholders blames the current market turmoil for the fund's predicament noting while the fund was not leveraged "some of the underlying funds in which it invests are leveraged".

"The mounting volume of redemption requests have been received as a result of market disruptions in the current environment generally rather than any systemic issue within the Fund itself although the Fund has suffered several months of poor performance over the last year," the shareholder document says.

Russell has also agreed to waive its fees for the Alternative Strategies II Fund to "reflect its commitment to structuring the closure... in a way that is in the best interests of all shareholders".

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