After Posting Massive Gains During The Pandemic, Some Hedge Funds Are Now On The Verge Of Liquidation
During the pandemic, hedge funds managers have been allowed more flexibility to purchase difficult to value and illiquid assets. In some cases, money managers used leverage to increase exposure and profits.
- Dan Sundheim's D1 Capital Partners pulled a $2 billion loan from J.P. Morgan in August 2020 using investments in private companies as collateral
- D1 Capital Partners deployed the additional funds toward more investments in private companies
- The strategy initially paid off as D1 reported a 70% value increase for its private investments segment last year
Last May, D1 Capital Partners reported being down 23% since January as public market equities plunged amid rising inflation and recessions fears. However, D1's lackluster year-to-date performance might only be the tip of the iceberg as many privately owned companies' valuations have been plummeting even faster than technology equities.
“Years of cheap and easy money have driven up valuations, [...] This year company multiples will fall, investor marks will fall, values in totality will fall.” said Taylor Rosanova, principal in the Advisory Services Group at Marcum
Winding Down And Returning Cash To Shareholders
Investors are now trying to figure out whether their hedge funds managers will be forced to halt withdrawals or face demands for more collateral from banks. In the worst-case scenario, some hedge funds could be forced into a fire-sale which would further push asset prices down in a chain reaction.
- Melvin Capital Management, the hedge fund scorched by the GameStop frenzy, anounced in May it would unwind its funds and return cash to investors after losses accelerated amid the current market turmoil
- Inflation and recession fears will continue to cause turmoil and volatility on private and public markets
- Hedge funds may be forced to sell private stakes in secondary markets to cover margin calls from lenders
- If losses mount and investors’ redemptions increase, hedge funds liquidations cannot be ruled out
Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.