Lawrence Asset Management Inc. has temporarily halted redemption orders in its flagship hedge fund after it plunged 65 per cent for the first 10 months of this year.
The firm “believes it is in the best interests of all shareholders to suspend redemptions for 60 days” on the Lawrence Partners Fund, its president Ravi Sood told investors in a letter on Monday.
“We are reviewing the situation and expect in the upcoming weeks to present to LPF shareholders a number of alternatives.”
After September's global market collapse, “the liquidity crisis deepened in October with equity markets experiencing declines not seen since the 1930s,” said Mr. Sood, who manages the hedge fund.
The Lawrence Partners Fund, which invests in smaller-capitalization Canadian stocks and has private equity holdings, saw its stellar track record unravel in September when it took a 48-per-cent haircut.
The Canadian market worsened last month when the S&P/TSX fell 18 per cent, boosting losses on the market to 35 per cent for the first 10 months.
Mr. Sood's fund is not the only one facing woes. Toronto-based Epic Capital Management Inc. announced last month that it was closing its flagship Epic Limited Partnership hedge fund after its assets fell sharply.
Besides the steep market downturn, the Lawrence Partners Fund was also affected by global credit tightening, Mr. Sood added.
“Lawrence Partners Fund was forced to adjust on little notice to more restrictive credit terms in an already problematic market,” he said, without elaborating.
Toronto-based Lawrence Asset Management began the fund four years ago from $5-million of seed capital from Mr. Sood and other employees. The assets were around $217-million in late March.
“In addition, LPF was negatively impacted by the delay in closing and lowered pricing in the acquisition of PBS Coals, a major holding of the [fund] by OAO Severstal,” Mr. Sood said.
Days before the fund was expected to receive proceeds from the deal, PBS Coals went into a renegotiation process that resulted in the hedge fund receiving less than 70 per cent of the expected proceeds, and several weeks later than expected, Mr. Sood added.
“Despite attempts to do so, we could not reduce our position in any way because we had agreed to a lock-up with Severstal in August. The reduced price constituted a large percentage of our losses in October.”
Besides the deterioration in the market value of the hedge fund, a significant percentage of the assets are in illiquid investments – now valued at cost – and any forced liquidation would “severely undermine the potential value that can be realized under less stringent time constraints,” Mr. Sood added.
“We believe there is value embedded in the illiquid public securities and in the private equity holdings, but it will take time, management and an improvement in the market conditions for this value to be realized,” he wrote.
The move to suspend redemptions affects those orders submitted for the Oct. 31 valuation date that were due to be paid mid-November.
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