RAB Capital's energy fund, once worth more than a £1bn, has banned withdrawals by investors as it struggles with the fall in the price of oil and other commodities.
The flagship fund has lost more than 50 per cent of its value in the last 12 months, and in a move to shore up its standing, RAB has moved to stop investors cashing in their holdings.
The step is allowed as part of the hedge fund's agreement with investors, but will irk those that are seeking to move their money away from a hedge fund industry that has come under increasing pressure in recent months.
Those wanting to leave the fund will be offered redemption shares – in effect an I-owe-you – rather than cash, whereby RAB promises to pay investors when it is in position to sell enough stock. Those willing to keep their money in the fund will be asked to lock in their money for three years in return for a cut in the management fee charged by the fund. Investors have until Friday to decide on the option.
A spokesman for RAB argued that the move was in the best interests of investors: "This is the logical thing to do with the markets as they are. It will enable RAB to operate the fund with much more stability once investors are locked in."
The energy fund has run into trouble as its holdings, largely in small cap oil and gas exploration companies, have lost value in recent months as the price of oil has dropped on recessionary fears.
There is a plethora of exploration groups on the Alternative Investment Market (Aim) that have sprung up in recent years, attracted to what was the growing price of oil, and which eventually reached a peak of $148 a barrel during the summer. Since then, however, oil has fallen as investors have become fearful about demand if the economy tips into recession.
The whole hedge fund industry has come under pressure in recent weeks as the economic downturn has eaten into once highly profitable investments. Highbridge Capital, the JP Morgan Chase majority owned group that is one of the world's biggest funds, is expected to cut as much as 10 per cent of its workforce. The fund has more than $25bn in assets under management.
This comes after Nouriel Roubini, an adviser to the US Treasury department during the Clinton administration, warned last week that he expects more than 500 hedge funds to go bust in the coming months.Reuse content