Stark To LPs: “Redeem This”

Bloomberg recently reported that Cerberus Capital Management is considering the creation of a “redemption fund,” for investors who have asked to withdraw their money. It’s basically a pay-in-kind solution to deal with Cerberus’ lack of liquidity. Not ideal — particularly if you want Cerberus to satisfy you like an ATM — but at least the goal is to get everyone paid (eventually).

For contrast, peHUB has learned that Wisconsin-based hedge fund manager Stark Investments has enacted a far more onerous pay-in-kind solution. In a March 23 letter, Stark informed investors that it has created new funds to hold its illiquid (read: toxic) assets. Redeemers now are eligible to receive just 50% in cash, and the other 50% as securities in the new toxic funds. As the letter read, in part:

“At this point in time, we have determined that paying withdrawal requests 100% in cash is not consistent with the best interests of the Fund’s investors. We also believe that an in-kind distribution will provide a fair distribution of the risks and rewards associated with certain less liquid investments and enable each fund to avoid becoming a forced seller of such investments.”

Three important notes:

(1) Stark apparently believes that 55% of the assets in the two affected funds — Stark Master Fund Ltd. and Sherpherd Investments International Ltd. — are illiquid or nearly-illiquid. What remarkably rancid performance.

(2) Stark did not seek investor approval before enacting this new structure. A Stark spokeswoman says that the firm’s partnership agreements allow it to make such moves without investor consent, so long as Stark determines the move to be in the investors’ best interests. I’m sure she’s on legal terra firma, but that doesn’t make it right. Seems to me that if this move is really in investors’ best interests, then investors should be trusted to ratify it (particularly given that brand new securities are involved).

Remember, this seems quite different from what Cerberus is doing. Cerberus is giving investors a long path to redemption. In Stark’s case, it’s basically saying: “We’ll give you 50% now, and 50% if/when we somehow liquidate those crappy assets we bought.” And given how unlikely such liquidation is (particularly at full cost), it’s perhaps closer to: “We’ll give you 50% now, and maybe a few more points down the road.”

(3) And now let us never speak of hedge funds again at peHUB.