"Hybrid" funds, with HF-style distressed investment strategies in PE-style closed-ended funds

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Does anyone know of managers doing distressed funds with an HF-style strategy (using PBs - for shorting, margin etc. - and ISDAs), but putting it in the kind of close-ended, drawdown fund usually used by PE managers, with capital locked up for X years? I think maybe Davidson Kempner's Long-Term Distressed funds did this (their older ones had PBs, for sure), and maybe others? I'm wondering how common this is, so I'd be very grateful for any info.

My thinking is:
- That kind of strategy needs cash on hand to support it.
- Closed-ended LP structures can't get new cash - they raise money at the start, draw it down when they need it, but that's that.
- So the fund needs to just hold cash, like a normal hedge fund, and so there's going to be an impact on IRR. This is why PE funds and other closed-ended funds don't hold much cash. (But maybe that isn't a problem, just as it wouldn't be in a hedge fund?)
- Because of cash/IRR issues, and because short selling is usually a short-term bet, most of the closed-ended funds are long-only and don't use PBs - I think? Or have I got this wrong?

Comments (8)

 
Apr 30, 2020 - 6:33pm

A good number of the well known event driven/distressed funds are set up to have a more flagship open end fund for more traditional liquid and event driven stuff and lock up drawdown funds for longer term distressed/re org plays (among potentially several other funds). Typically most would keep more trading heavy arbitrage or shorting strategies in the open end but just depends

 
Apr 30, 2020 - 11:59pm

not sure what the question here is. but this landscape is changing all as a function of LP demand and liquidity mismatches. the distressed debt Hf with 2/20 fees, no hurdle and quarterly liquidity is rapidly declining. replacing it are PE style drawdown funds with 7 year lock ups, 8% hurdles.

the PE structure is less lucrative for the hedge fund guys but that’s what the LPs want. and it becomes a shitshow when you have quarterly redemption and the fund is invested in these unlisted postreorg equities and other illiquid situations. even public “liquid” distressed trades are pretty friggin illiquid to get out of. One day looking at Distressed bid ask spreads and sizes will show you.

Blue Mountain - gone
York - main distressed credit HF gone -> still raising locked up Distressed Asset funds
King Street - bleeding credit Hf AUM
Anchorage - bleeding credit Hf AUM

 
May 1, 2020 - 3:17am

This is categorically unequivocally true. Something no one seems to get these days...all pretending like the 1990s/2000s MgmtCo revenue dollar per AUM dollar somehow hasn’t declined MEANINGFULLY.

To answer OPs question, it depends but certainly our drawdown pockets don’t do the CDS, heavily long short strats our flagship does but holds many similar bond positions with varying degrees of expected target hold periods.

 
May 1, 2020 - 3:20am
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