ROBERT SIEGEL, host:
From NPR News, this is All Things Considered. I'm Robert Siegel. For the hedge-fund industry, 2008 was a year of scandal and decline; a lot of hedge funds lost value. As a result, a lot of investors want to pull their money out. But the hedge-fund business doesn't operate like other parts of the financial market. In some cases, hedge-fund managers can simply decide not to give investors their money back, and that is generating some controversy, as NPR's Jim Zarroli reports.
JIM ZARROLI: Over the past few years, investors couldn't get enough of hedge funds. Those are big, private pools of investment dollars popular with rich people. Investors poured more than $1 trillion into them, and hundreds of funds popped up to absorb the cash. But after the stock-market crash and the mortgage meltdown, the good times came to an end. Charles Biderman is CEO of TrimTabs Investment Research.
Mr. CHARLES BIDERMAN (Founder and Chief Executive Officer, TrimTabs Investment Research): The global slowdown has hurt the equity markets; it's hurt the commodity markets; it's hurt all the markets. And so, from everything going up, everything started going down, and without global growth, a lot of these funds are just collapsing.
ZARROLI: Biderman says hedge funds lost on average 20 percent last year. That wasn't bad compared to other kinds of investments. But hedge-fund customers, who include a lot of big institutional investors like pension funds, expect to do better. So, many began pulling their money out, as much as $200 billion during the last four months. And the redemptions would have been even greater if not for the fact that a lot of hedge funds simply stopped letting investors withdraw their money. They slammed shut their gates so no one could get out, even as they kept collecting big fees. Biderman says many funds reserve the right to restrict withdrawals for up to a year in their rules.
Mr. BIDERMAN: Some hedge funds are not liquid, meaning that they invest in strategies that are - take longer to unravel and unwind. And so if someone wants their money out, you can't just sometimes sell what you need to sell and give shareholders their money back.
ZARROLI: In the past, investors agreed to these restrictions because they badly wanted to get into the funds. And in the largely unregulated hedge-fund universe, there was nothing government officials could do. But James Ellman, president of the hedge fund Seacliff Capital, says now that more funds are losing money, a lot of investors are grumbling.
Mr. JAMES ELLMAN (President, Seacliff Capital, LLC): Investors, of course, are usually not going to be particularly excited about being told that they can't get their money out when they need it, especially when they thought it was, in fact, their money in the first place.
ZARROLI: This week, one of the most successful hedge-fund executives, John Paulson, criticized his colleagues for blocking redemptions. Paulson says fund managers have the responsibility to make cash available to investors who want their money back. James Ellman notes that when a hedge-fund manager blocks withdrawals, investors who really need cash may have to pull money out of other funds instead.
Mr. ELLMAN: And that's - those funds that do not have a gate become the ATMs for the investors, and it causes even more of a wind-down and sell-off in assets from the industry and across the markets.
ZARROLI: Ellman says funds that restrict withdrawals can hurt themselves as well, because the when the gates reopen and investors are allowed to take their money out at last, there could be a stampede for the exits. But with many hedge funds facing extinction, they may have little alternative but to bar the doors and try to buy a little time until the market improves. Jim Zarroli, NPR News, New York.